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Volume 62, No. 2 February 2006


Warlords compete for territory and slaves. Courtiers compete for influence with the king. Bureaucracies compete for resources. Gladiators were forced to compete to entertain the spectators. Not all competition is healthy.

There is, however, no substitute for free competition as a means of lowering prices and improving customer service.

Moreover, competition is "a tool for finding answers that we don't have," write Michael Cannon and Michael Tanner in their new book, Healthy Competition: What's Holding Back Health Care and How to Free It, published by Cato.

What is the best football team? How much should an MRI cost? What is the most effective treatment for an illness? While there is no ultimate answer for such questions, there is a best answer under the circumstances, and finding it requires what Friedrich Hayek called a "discovery procedure."

Healthy competition requires an open market with a wide range of potential competitors, including upstarts and innovators. It also requires a constant process for evaluation and feedback for products and services, this should best come directly from the users themselves.

Competition in the heavily regulated arena of American medicine is increasingly of the zero-sum, divide-the-spoils type. The government or an elite committee with quasi-governmental authority has already decided the answers. Or it decides which questions shall be researched, which range of answers shall be considered, and which conclusions may be published, through its stranglehold on funding.

How much money shall be spent on Medicare? Which hospital services shall be lucrative, and which nonremunerative? What certificates must a person hold to do drug-abuse counseling in a federally funded facility? How soon is a person in hospice care supposed to die? What types of screening tests are worth paying for, or perhaps requiring? What number of level-4 visits or 88305 pathology services is "just right"?

Congress "decides" such things in behind-the-scenes horse- trading contests. Or it delegates the decision to unknown, unaccountable bureaucrats (or prosecutors) at HHS or CMS or the Department of Justice.

Federal aid to education led to federal standards and complaints of "teaching to the test," with neglect of other material and a disastrous decline in basic literacy, such that many patients can't read the label on a pill bottle.

The "test" for physicians who want to be paid and get a good quality rating is to evolve from the CMS Physician Voluntary Reporting Program Measures. There are thousands of possible interventions for thousands of conditions of primary concern to a patient perhaps revealed only by taking the time to do a level-5 consultation. But physicians are eventually to be graded on the chosen set. For now, they are "asked" to report "voluntarily" (without extra pay), certain "G" codes.

Never mind existing controversies or future innovations. The important items are: use of aspirin, beta blockers, ACE inhibitors or angiotensin receptor blockers, warfarin, antidepressants, influenza and pneumococcal vaccines, antiplate- let drugs, and osteoporosis treatments; measurement and control of hemoglobin A1c, blood pressure, and low-density lipoprotein; annual assessment of function and pain in osteoarthritis; anti- tobacco counseling; assessment of bone density, fall risk, hearing, and urinary continence in the elderly; mammography; and antibiotic and thromboembolism prophylaxis.

For coronary artery bypass, there's a G-code for using the internal mammary artery, and one for documenting why not.

Which financing method provides the best value? How can we find out, when the competition is heavily constrained by the federal tax code and state insurance regulations? The Shadegg bill, which would have allowed purchase of insurance across state lines, never made it to a vote. The oxymoronic concept of "managed competition," the basic idea of the failed Clinton Health Security Act, lives on. (One prime example is the Federal Employee Health Benefits Program.)

How is information technology best used? The chosen players in the "American Health Information Community" will determine what system must be used for all medical recordkeeping. And how will its "voluntary" adoption be forced?

HHS Secretary Leavitt envisions turning the medical community into something like a network of PCs. As HHS pays more than 40% of the nation's medical bills, it is "the only place where there's a concentration enough of power to make this happen in the market" (transcript of AHIC meeting).

Because so many managed-care entities use HHS price controls for "shadow pricing," the clout of HHS is greatly amplified. Low- end price competition is greatly handicapped: it is difficult to compete with "free" services.

Antitrust law is supposed to protect competition, but since insurers are exempt, it has the opposite effect in medicine. Since 2001, the government has filed 27 complaints against physician groups (comprising 13,000 physicians) for rejecting a payer's offer and insisting on jointly determined compensation terms. Almost all signed "consent orders," noted the Voluntary Trade Council. Meanwhile, insurers merge, although the DOJ did recently require a divestiture in UnitedHealth Group's acquisition of PacifiCare health systems.

Healthy economic competition is about creating value, not cutting up "the pie." Rewards must be freely offered by the individual customer, not extorted by force from the collective. The law must apply equitably and not advantage powerful special interests. Only patients can judge whether medicine achieves its purpose of healing or comforting the sick. The goal of current unhealthy competition is to consolidate government and favored corporate power and further its social objectives.

Competition: Here and Abroad

Specialty Hospitals. The Milwaukee Heart Hospital offered the most complex operations, carefully benchmarked its results, operated at high efficiency, and achieved top marks for patient and staff satisfaction. It lasted one year. It was hindered by the Specialty Hospital Moratorium imposed by Congress and doomed by anticompetitive practices of local "nonprofit" hospitals. While hospitals and legislators say it is a conflict for doctors to own even a small share in a hospital, no one says it is a conflict for hospitals to own doctors. About 90% of primary-care doctors in southeastern Wisconsin are owned by hospitals. Large hospitals near Milwaukee told its physicians which heart specialists they could use, and choked off the Heart Hospital's referrals (Bruce C. Wilson, Wall St J 1/5/06).

Favors to Insurers. Blue Cross/Blue Shield plans were given outrageous preferences in state enabling legislation, writes Greg Scandlen. All kinds of antitrust violations, such as tying arrangements, were allowed, and they were given huge breaks on reserve and capitalization requirements based on the fiction that providers would bail them out of financial difficulty.

HSAs Shackled. The silly maximum deductible amounts for HSA-qualified insurance plans must be liberalized, writes Frank Timmins. As with any financial institution, HSA banks must have large deposits to mitigate administrative expenses. No one wants to manage $500 checking accounts.

Medical Tourism Booms. According to the newspaper Times of India, 150,000 people traveled to India for medical care last year, mostly from the U.S. Numbers are growing 15% per year and should bring $2.3 billion annually to the Indian economy by 2012. Thailand is wooing General Motors; orthopedic procedures can be done there at 10% of the U.S. cost.

Canada Fears Private Competition. As Canada's first private primary care center opened in Vancouver, critics said it will undermine health care (Canadian Press 11/25/05). The Manitoba government threatens to fine a private center $5,000 for allowing a patient to pay for a medically necessary MRI (Canadian Press 11/23/05). In exchange for $41 billion in federal money, provinces agreed to set out guidelines for acceptable wait times, but haven't yet done so. Average actual wait times decreased by one day (National Post 10/25/05).

2006 Index of Economic Freedom

In 2006, the United States ranks ninth in economic freedom on the Heritage/WSJ index (down from fifth in 1995), tied with Australia and New Zealand, and behind Hong Kong, Singapore, Ireland, Luxembourg, Iceland, the UK, Estonia, and Denmark. With rapid liberalization, Estonia's per capita GDP doubled between 2001 and 2004, and support for freedom remains strong. As Mary Anastasia O'Grady notes, quick change is best: "Gradualism risks stagnation and even reversals, because the benefits are not evident enough to impress the electorate and generate momentum" (Wall St J 1/5/06).

In 1985, the "Celtic tiger" made a U-turn from the usual European policies, slashing taxes and government spending. Its GDP grew 167% between 1984 and 2002, and it moved from one of the poorest to one of the most prosperous countries in Europe (TechCentralStation 3/28/05).


CPOE Increases Mortality

Although computerized physician order entry systems are supposed to prevent errors, in actual operation CPOE was associated with a 135% increase in mortality at the Children's Hospital of Pittsburgh. Possible reasons include a decrease in face-to-face interactions of personnel; diverting a physician from the bedside to a computer screen; and a delay in obtaining emergency medications that now have to come from a central pharmacy (Han YY et al., Pediatrics 2005;116:1506-1512).


Entitlement Explosion

Today, the U.S. GDP is $12.5 trillion; the national debt, $4.7 trillion; combined Social Security, Medicare, and Medicaid spending, $1.0 trillion; and annual cost per worker, $5,681. If present trends continue, by 2030 GDP will be $35 trillion; the national debt, $48 trillion; combined SS and Medicare/caid spending, $6.3 trillion; and cost per worker, $32,221.

James Knight, M.D., former president of the San Diego County Medical Society, writes: "Congress just authorized a new fence along the Mexican border, ostensibly to keep out illegal aliens. In 15 years, it will be used to keep people with any accumulated net worth from fleeing the country as the U.S. is `forced' to implement asset-based taxation!"

Dr. Knight points out that seizing all the wealth of the top 10% of Americans might extinguish part of today's debt but would have no effect on future debt accumulation. All the rich being poor, taxing workers would be the only revenue source.


"Insurance Does Not Participate in My Office"

"I never did understand why we allowed the insurance industry to imply that it was the doctor who was not participating," writes R. Anders Rosendahl, M.D. Dr. Rosendahl, who specializes in thyroid surgery, does not accept

Medicare, Medicaid, or any other health plan of any kind.

"We accept cash, checks, credit cards, I.O.U.s, payment plans, and we take care of the truly poor at no charge." If the patient's cell phone rings during the exam, he's not truly poor.

After 30 years at the Texas Medical Center in Houston, Dr. Rosendahl left 22,000 charts behind and moved to Lakeway, a small town outside Austin. His practice was featured in Physicians Practice, Nov/Dec 2005, headlined "He Does It His Way." He said some of his colleagues thought he was crazy; others ask for his advice. His patients think he offers medical care as it ought to be and once was. His overhead decreased dramatically. While his income dropped somewhat, he expects to be as busy as he wants to be within a year. His website is www.thyroidcancer.com.


AAPS Calendar

Feb 11, 2006. Board of Directors meeting, Houston, TX.
Sept 13-16, 2006. 63rd annual meeting, Phoenix, AZ.

Medical Information Subject to PATRIOT Act

Under the controversial Section 215 of the USA PATRIOT Act, commonly called the "library provision," both medical and tax records can be obtained under a gag order with a National Security Letter (NSL). Although it is theoretically possible for a recipient to consult an attorney and challenge an NSL in federal court, there is a one-year criminal penalty on divulging that an NSL has been received, even when there is no attempt to obstruct justice. An effort was made to remove the criminal penalty, as well as to explicitly require that the records be somehow connected to a foreign power. The final form of the reauthorized Act has not yet been determined (Congressional Quarterly 12/14/05).

U.S. Attorney General Alberto Gonzales testified before Congress that no medical records had yet been requested, but that the government needed to retain the power to get them (Joy Buchanan, Daily Press 12/29/05).


OIG Plans to Exclude Thousands

In its 2006 Work Plan, the HHS Office of the Inspector General writes: "we anticipate...the exclusion of several thousand providers from participation in Federal health care programs." Actionable conduct includes "failure to provide services that met professionally recognized standards of care."

In the second half of 2005, civil money penalties were up 632%. OIG excluded an average of 10 providers a day, and recouped $2.8 billion in audits and "fraud" investigations in FY 2005 (Medicare Compliance Alert 12/12/05). There were 537 criminal and 262 civil actions. HealthSouth agreed to a settlement of $325 million (BNA's HCFR 12/7/05).


Equal Under the Law?

While the OIG is eager to mete out what many consider to be a professional death sentence exclusion from federal programs the U.S. attorney hesitated to pursue a criminal conviction in the fraud case against Blue Shield of California. The reason: "the potential collateral consequences..., including debarment from all Government contracts and exclusion from the Medicare program, could have been devastating to Blue Shield, which depended heavily on doing business with the Government." The consequences at first seemed "disproportionate." When it was recognized that the corporation was unlikely to be excluded from all contracts, the criminal case was brought, and pursuant to a plea agreement Blue Shield paid a $1.5 million fine. The parallel civil proceeding resulted in a settlement of $12 million.

Blue Shield employees were pressured to pass the Contractor Performance Evaluation Program (CPEP) at all costs. The company tried to argue that it was entitled to all of its administrative costs; the government argued that time spent falsifying records, destroying documents, and "whiting out" information was not an allowable cost (see USABulletin, June 1997, and "Report from a Medicare Whistleblower," Parts 1 and 2, J Am Phys Surg 2003;8:87-88, 114-116).


"There is no law that says computers have to be more important culturally, economically, or scientifically than any other technology that's been around for awhile. Some day, computers might be exactly as exciting as oil burners or toaster ovens."
David Gelernter, Wall St J 10/6/05


Voluntary Reporting: Evidence Against Doctors?

Some physicians fear that data from the CMS Voluntary Reporting Program (see p. 1) will be used to file False Claims Act (FCA) allegations against those who score below average on "quality of care." Concerns arise from the push by the government to use the FCA to question poor medical judgment and prosecute providers for negligence. The program's advocates say the government is not currently planning to use the information against physicians, but only to help compliance staff avoid allegations that they billed for services that weren't provided. The program is a step toward P4P (MCA 11/14/05).


Physician Fined for Ordering Excess Pain Meds

Family physician Joan Benson, M.D., of Bangor, ME, agreed to pay more than $100,000 in state and federal fines for overprescribing oxycodone and morphine to a complex patient with intractable pain. Unbeknownst to the doctor, the patient's husband was diverting some of the drugs. Gordon Smith, executive director of the Maine Medical Association, said that Dr. Benson was a "fine, compassionate physician." He feared that the U.S. Attorney's aggressive handling of the case would make other physicians fearful of prescribing appropriately for pain (Bangor Daily News 10/18/05).


Government Retaliates Against the Defense

After losing a case alleging "Shaken Baby Syndrome," the prosecution retaliated against prominent defense witness John Plunkett, M.D., by prosecuting him for alleged false swearing on two minor, non-material issues.

Dr. Plunkett is the author of an article on short-distance falls that called into question the theory behind SBS (Am J Forensic Med Pathol 2001;22:1-12). He has testified in more than 100 cases and consulted in more than 400.

Other defense witness report feeling intimidated even though Dr. Plunkett was acquitted at trial.

A selective prosecution to silence witnesses would probably be a first, writes law professor Carol Henderson.

Expert witnesses have been sued for allegedly misrepresenting their credentials or violating professional standards. But Henderson says she has never before heard of an expert being prosecuted criminally for apparently good-faith testimony on a subject about which scientific opinion is deeply divided (ABA Journal, December 2005).


Tip of the Month: I respectfully disagree with the statements that "physicians cannot agree among themselves to do anything about PPO contracts" because that would be "antitrust collusion [that] has repeatedly been prosecuted."

Having worked as an attorney in antitrust law for a decade and having successfully defended antitrust claims at trial, I can tell you that antitrust law is exaggerated to intimidate doctors. Doctors who avoid price-fixing agreements and joint boycotts have little to worry about from antitrust law.

There is a vast amount of productive activity that would not qualify as price-fixing or joint boycotts. Individual rejection of PPO contracts combined with free speech is legal. Also legal are complaints about unethical provisions in PPO contracts and refusals to agree to them. Many types of collective actions by doctors, if properly devised with reasonable justification, would be legal
Andrew Schlafly, Esq.


EMRs and the "Blended Pay" Scam. Anthem's Blue Cross Blue Shield of Ohio "encouraged" doctors to use electronic medical records. Then it found that physicians who did so could more easily document their care and so were billing for 25% more level-4 services costing Anthem $1 million more in physician payments through September. So instead of paying for actual services rendered, Anthem began "blending" levels 3 and 4 into a single payment rate. In the New York City area, Cigna has been "blending" rates for levels 3, 4, and 5 since 2000. This tactic is another variation on the other scams that Medicare introduced, such as the bundling scam ("correct coding initiative") and the automatic downcoding scam.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY


Resign Now! Another piece of the mask has been ripped from the face of the EMR. Since the EMR permits more complex codes to be more accurately billed, the payers simply reduced their payment rates. So one of the benefits of the EMR, highly marketed to physicians by the AMA and the AAFP, of perhaps being fairly compensated for our work, turns out to be a complete farce. I hope physicians will have the courage to tell these payers what to do with their "blended" rates by withdrawing from such plans.
Everest Whited, M.D., Pflugerville, TX


Pathology Codes. There is no doubt that the government's limiting 88305s to two per site per day would have a devastating effect on most real practitioners of pathology. The 88305 is their bread and butter. Of course, we all hope it won't really happen and that our staunch organizations will be able to pull off a delay or a compromise. Just like they stopped the hospital corporations' pillaging of the wimpy Part A "pass through." But in the long term, the only thing that has any chance of working is to quit Medicare and Medicaid.
John Minarcik, M.D., Skokie, IL


Seniors' Drug Costs. As bread and circuses crowd out other spending, the result will be poor medical care for people stuck on Medicare, a growing acceptance of the idea that the elderly should be killed off when their QALYs are too low, and an increasingly serious attempt to loot the assets of privately held pharmaceutical companies all in the name of quality and cost control. Then there will be a demand for tax increases, to the detriment of the economy; anybody worried about the U.S. barely hanging in the "free" segment of the Heritage/WSJ economic freedom index? We should take Part D behind the barn and kill it while it is still small enough to handle.
Linda Gorman, Independence Institute, Golden, CO


Saying No to Part D. A premium of $37/mon comes to $444/yr. If you're one of the 70% of seniors who expect to continue to have less than $500/yr in prescription drug costs, you are entering negative-value territory if the deductible and copayments top $57. A large percentage of Part D participants will probably be high users, meaning that premiums will rise, causing more to drop out (if they can). Those of us familiar with community rating and guaranteed issue know the rest of the story: it's called the "death spiral."
Sean Parnell, Heartland Institute, Chicago, IL


Know When to Fold It. The vast majority of physicians have agreed to play the game set by third-party payers. But they don't have to pick up the hand the third parties have dealt them or even sit at their gambling table. In the quiet of their conscience, they can just say no. They will enter a much better world. No need to scrutinize 50-page contracts, or hire three billing clerks, or worry about not getting paid.
Robert S. Berry, M.D., Greeneville, TN


"Reverse Bundling." Rumor has it that the Canadian government has delisted some procedures, and that some doctors have illegally stretched the definition of delisted procedures and require patients to pay for services that are supposed to be "free." Apparently, government chooses to look the other way to avoid jailing doctors and thereby exacerbating the doctor shortage it created.
Robert P. Gervais, M.D., Mesa, AZ


As Bad as Slavery? Given the net present value of projected government deficits for each American under the age of 18, Americans are bequeathing $900,000 in debt to each child. This means that future generations will be consigned to indentured servitude for much of their working lives to pay the debts accumulated by previous generations. Next to slavery and Jim Crow laws, this may be the greatest injustice ever inflicted on so many Americans. If Americans really loved their children, they'd be driving to Washington to demand a change.
Craig Cantoni, Scottsdale, AZ


Charity. Physicians should not provide charity to third parties, only voluntarily to needy patients.
Milton Kamsler, M.D., St. Augustine, FL


Happy with an MSA. We self-funded a high deductible even before the law was enacted and have had a Medical Savings Account for several years. It has saved us a lot of money. If we get all the medical care we need, with no hassles or obstructions, the most it can cost is the premium plus the deductible.
Zvi Herschman, M.D., West Hempstead, NY

Legislative Alert

The Budget Battle Continues

It's not over! The big health policy issues physician payment in Medicare, and the variety of Medicare and Medicaid changes are still not settled as this goes to press.

Here's where things stand. The Budget Reconciliation bill, if enacted and signed by the President, would cut federal spending by an estimated $39.7 billion. The Medicare savings would amount to $6.4 billion over the period 2006-2010; the Medicaid savings would amount to $4.7 billion over the same period. No big bucks here, but some pretty important policy provisions. The Administration and Congressional Republicans are hailing the legislation as the first serious attempt to control entitlement spending in years, while the Congressional Democrats are roundly condemning it as a heartless attack on the poor and the disabled.

On Dec 19, the House passed the budget bill shortly after 6 a.m. by a relatively close party-line vote: 212 to 206. Having enacted the bill, House members left Washington for the Christmas recess. On Dec 21, the Senate passed the bill by 51 to 50, with Vice President Cheney breaking the tie. But the conclusion to Senate deliberations was a bit messier.

The closeness of the Senate vote was largely attributable to the defection of "moderate" or "liberal" (take your pick) Republicans: Susan Collins and Olympia Snowe of Maine, Mike DeWine of Ohio, Lincoln Chafee of Rhode Island, and Gordon Smith of Oregon. Medicaid policy has been the flashpoint. For example, Sen. Smith opposed the final bill largely because he opposed the changes, small as they were, in Medicaid. The Congressional Budget Office projects that, under current law, Medicaid is expected to grow 7.7% between 2006 and 2015. Under the budget bill, CBO projects a minimal reduction to a ten-year growth rates of 7.5%.

Still, for the Senate liberals this is apparently too much. Senate Minority Leader Harry Reid (D-NV) said the budget bill "rips and tears" at Medicare and Medicaid. The Center on Budget and Policy Priorities bemoans the cuts to programs that serve low-income Americans. While Sen. Smith seems to feel that federal Medicaid spending increases should not be restrained, it will be interesting to see how state Medicaid spending in Oregon is projected to increase, and how Oregon taxpayers will be expected to finance it.

For Congressional conservatives, there is an important political lesson here: When it comes to entitlement spending, there is no volume control on the Left. Sustained screaming is guaranteed. The decibel levels are roughly the same whether spending restraints are large or small. Thus the opposition by Sen. Smith and his Democratic colleagues is to be expected, no matter what is proposed. Therefore, conservatives might as well enact serious changes in entitlement programs, and provide themselves with a good set of ear plugs.

Opposition to Medicaid changes, among other things, inspired parliamentary creativity. Before final passage, Senate Democrats resorted to a parliamentary maneuver designed to force Congressional reconsideration of the entire budget bill. They deleted three provisions in the final bill that they claimed violated Senate rules for considering budget reconciliation measures. Clever maneuver. Now, because the three provisions were deleted, and the language of the House and Senate-passed bills must be identical, the budget bill must go back to the House for another vote. This would mean that Speaker Dennis Hastert would have to call the entire House back to Washington to pass the altered bill to get it to the President's desk before the New Year. Or, he could ask for unanimous consent from the Minority. Since House Minority Leader Nancy Pelosi (D-CA) has already expressed strong disapproval of the House-passed budget bill, that's obviously not in the cards at least not as this essay goes to press.

What this means is that the Leftist coalition (AARP, Families USA, the Emergency Campaign for America's Priorities, the National Partnership for Women and Families, etc.) that campaigned vigorously against the Budget Reconciliation bill largely because of their objections to Medicaid changes will get yet another bite at the apple. They think they have a chance to beat the Republican majority in the House, and hand Bush yet another setback in Congress. So, over the next few weeks watch the pressure build to reverse the House vote on the budget bill.

What's at Stake in the Unfinished Budget Fight

For doctors, patients, health care policy aficionados, and taxpayers all, what's at stake? With Medicare, there's a bunch of "cats and dogs," special interest stuff, including provisions relating to hospitals, rehabilitation facilities, and payment for imaging, oxygen, and durable medical equipment. With Medicaid, there are likewise administrative and program changes, including provisions that are broadly described as addressing the problems of "waste, fraud, and abuse," such as preventing states from double billing the federal taxpayers for Medicaid prescription drugs and requiring documentary evidence of citizenship for Medicaid eligibility. Beyond these administrative issues, here are the main health policy items:

Medicare Physician Payment. If nothing is changed in current law, Medicare payments to physicians will go down. The budget reconciliation bill would block the implementation of payment reductions that are scheduled to go into effect under the formulas, including the sustained growth rate (SGR) update, that have been enacted in current law. The pending bill authorizes $7.3 billion for physician payment over the period 2006-2010. Instead of the 4.4% reduction scheduled to take effect in 2006, the bill would freeze the physician update for 2006. In other words, that would be a 0% update. Well, nothing is better than less than nothing; even though that's a metaphysical impossibility, it's sound mathematically.

While providing a temporary fix, the bill does nothing to alter the flawed Medicare physician payment system. It would require that HHS study the SGR system with a view toward offering an alternative, and report those findings next year. Another study. That's it.

The Medicare "pay for performance" provision, tying physician payment to the submission of HHS formatted quality data information, which was included in the Senate version of the bill, was dropped in the House-Senate conference. Conspicuously, the provision will start to apply to other providers. Growing physician opposition to the provision's red-tape requirements derailed it this year, though the proposal is not dead. Look for a resurrection of the "values purchasing scheme" next year. The Bush Administration and the leaders of CMS are apparently wedded to the idea. Watch for lobbyists for other professional medical organizations trying to make "a deal" on new pay-for-compliance rules. The right position, of course, is No Deals. Roll back red tape; don't increase it.

The final bill retained a goofy, fiscal-year-end 6-day Medicare payment delay for medical professionals. A gratuitous insult. Perhaps some enterprising conservative will propose an amendment to delay congressional pay at the end of the year to achieve "budget savings." Don't hold your breath.

Medicare Advantage Program. The final bill also dropped the Senate's proposed $10 billion cut in the Medicare stabilization fund, the temporary incentive program designed to encourage private plans to participate in the Medicare Advantage program, particularly in rural areas of the country.

Specialty Hospitals. The original Senate bill had a provision, authored by Senators Charles Grassley (R-IA) and Max Baucus (D-MT), to retain restrictions on the expansion of specialty hospitals first enacted in the Medicare Modernization Act of 2003. The Senate provision would prevent doctors from referring their Medicare and Medicaid patients to hospitals or other medical facilities in which they have a certain level of financial interest.

Since hospitalization is heavily concentrated among the elderly, the direct impact of this provision was to virtually halt the expansion of specialized hospitals over the past two years. Now, in the normal functioning of an economy, economic specialization is a good thing. The division of labor in an increasingly complex economy increases productivity and enhances price competition. Professor Adam Smith, the author of The Wealth of Nations (1776), has written about the virtues of specialization and the division of labor extensively, and members of Congress might even want to sneak into the library to check it all out for themselves. Naturally, the hospital industry is opposed to the expansion of specialty hospitals for a lot of high-flying reasons, but the real truth, you will be shocked to learn, is that they don't want the competition. In the House- Senate Conference, the conferees agreed to retain the provision for six months in the final bill, and order HHS to do a study on it, and come back with recommendations. That fight, then, is not over.

Medicaid Prescription Drugs. The bill imposes an upper payment limit for "multiple source drugs" of 250% of the average manufacturer price. For drug pricing generally, it would require generic prices to be included in calculating Medicaid drug rebates. The bill would also require the states to collect Medicaid rebates on drugs administered by doctors to Medicaid patients.

Medicaid Long-term Care. The bill addresses the continuing and deepening problem of Medicaid as a long-term- care payer for the middle class and above. Among other things, it would require individuals who apply for Medicaid long-term-care coverage to disclose large annuities, and it would improve income reporting. Perhaps more importantly, it would specify that persons with a home equity of $500,000 (or $750,000 at the discretion of the states) would no longer be eligible for Medicaid coverage of long-term care. In 2007, states would be authorized to provide a range of home and community-based services as an "optional" benefit under state Medicaid plans without first securing waivers from HHS; it would also authorize "cash and counseling" programs.

The long-term-care provisions, particularly the new asset limitations governing Medicaid coverage for nursing home care, have stirred the intense opposition of the powerful AARP, which has pledged to reverse them.

Medicaid State Flexibility. The bill provides $283 million in funds for the State Children's Health Insurance Program (SCHIP) for targeted states. More importantly, the bill would enable the states to determine for themselves the best arrangements for cost sharing and premium payments. It would also enable states to offer alternative benefit packages to certain Medicaid beneficiaries, and allow states to impose cost-sharing requirements for "non-preferred drugs" and for the use of non- emergency medical services in hospital emergency departments. Finally, the bill allows states to cover certain disabled children in families with incomes up to 300% of the official federal poverty line, while funding a new demonstration program in which the principle is that the money will follow the beneficiary. Money following the patient! Pretty radical stuff.

These Medicaid flexibility provisions would accelerate the reform agenda that is already underway in several states, notably Florida and South Carolina. The Bush Administration is interested in aggressively promoting Medicaid waivers for states that want to pursue new and innovative approaches to Medicaid coverage. Meanwhile, the Bush Administration's Medicaid Commission, which has a strong conservative presence, is pondering its next set of recommendations.

Medicare Drug Entitlement Is Now in Effect

After two years of planning and preparation by officials of CMS arguably the greatest exercise in central planning in the agency's central-planning history the massive Medicare drug benefit has gone into effect. According to HHS, more than one million have signed up for the new stand-alone drug plans, and they expect another half million to be signed up in January. Medicaid-eligible seniors are automatically enrolled; seniors with Medicare Advantage plans and employment-based retiree coverage, which will henceforth be subsidized by federal taxpayers, are also counted in the enrollment figures. By the latest HHS count, more than 21 million seniors would have prescription drug coverage by January 1, 2006. HHS expects to enroll a total of 28 to 30 million beneficiaries within the first year of the program, which would accord with CBO projections of 29 million in enrollment. A lot of predictions have been made on all sides of this issue about what will or will not happen. One thing is certain: Nobody yet knows how we are going to pay for it.

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