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Volume 60, No. 1 January 2004


"The insurance industry has effectively ruined American health care, causing multiple times the systemic damage of the oft-maligned trial attorneys," writes John E. Stone, Director of the U.S. Freedom Foundation.

With average family premiums running $9,000 a year, despite median family incomes of only $42,000, "the comprehensive health insurance economic model is no longer viable." Therefore, Stone concludes, "it's time for an all-out revolt...."

This means recognizing that the proper function of insurance is to serve as a financial service, not a health agency. Even many insurers have now stopped calling the product that the uninsured lack "insurance." In enrollment materials, Blue Cross Blue Shield, Aetna, United, and others use the term "health care plan" or "health benefits plan."

An insurance contract is a two-party contract between a consumer, who pays a premium, and a carrier, who "indemnifies" the insured in the event of a loss. Third-party plans, on the other hand, involve a triangular relationship, with the "insurer" paying the "provider." In such arrangements, there is little accountability between the partners: and thus continuing demand for government intervention.

After 100 years of government regulation, "we are left with an industry that is too expensive, too bureaucratic, and too indifferent to the needs and desires of consumers," writes Greg Scandlen of the Galen Institute.

In the early twentieth century, Scandlen notes, sick workers lost two to four times as much in wages as they spent for medical costs. As medical costs were a relatively minor risk, comprehensive "major medical" coverage did not exist in 1940.

The first serious effort at prepayment for medical care was a prototype Blue Cross plan in 1929. Blue Cross and later Blue Shield, insisting that they were not insurance companies, were organized under special enabling acts that provided them with tax-exempt status and immunity from many insurance regulations. Owned by hospitals, Blue Cross served to ensure them a constant revenue stream.

The Blues' market domination enabled them to dictate the shape of medical benefits. Commercial insurers adopted "assignment of benefits" as a substitute for "service benefits" paid to "participating providers."

Medicare was also modeled after BCBS.

In 1965, the founding of Medicare and Medicaid launched the great spending spree. Out-of-pocket payments dropped from nearly 56% of the total in 1960 to 36% by 1967 (and 15% by 2000). Excess demand outstripped supply and caused a surge in prices, as predicted by basic economic theory. The government response, Scandlen writes, was to "create a vast bureaucracy of health planning agencies to further reduce supply!"

In order of occurrence, Scandlen lists major market distortions caused by government: (1) professional licensure; (2) state laws enabling hospitals to form vertically integrated payment systems; (3) exemption of fringe benefits from World War II wage and price controls; (4) a tax break only for employer- provided insurance; (5) federal seed money only to hospitals, encouraging high-tech institutional care; (6) an antitrust exemption solely for insurance; (7) Medicare and Medicaid; and (8) "cost-containment" programs, including price controls and certificate of need.

Health benefits are unaffordable, with no end in sight for the cost spiral. A young family in New Jersey has $600 per month taken from its paycheck for an employer-sponsored HMO, and pays a $30 copay for each office visit while the total cost of all childhood vaccines is about $450 per child.

If this family could buy a $5,000 deductible policy for $250 per month (forbidden by New Jersey law), it would have an extra $350 per month and could accumulate savings sufficient to cover the deductible in a little more than a year, if it were not for taxes. Most will not need to spend all of their savings for medical care. Compare the potential economic stimulus to that of the tiny Bush tax cut of $30 per month.

The main impediment to realizing this savings apart from state mandates and the tax code, the latter ameliorated if the Health Savings Accounts (HSAs) in the new Medicare law survive Sen. Daschle's attempt to repeal them is fear.

The realistic basis for fear is the enormous burden of cost- shifting imposed on patients who pay directly. Hospitals are the most recalcitrant in resisting negotiation and have even used "body attachment" having patients arrested for nonpayment of grossly inflated charges (Wall St J 10/30/03).

After K.B. Forbes filed seven lawsuits against California Tenet hospitals, AAPS California chapter president Tom LaGrelius, M.D., was able to persuade his main hospital to give a 60% discount from published fees on all hospital services to cash patients who paid their bills within 30 days.

A critical mass of patients with their own money to spend, as in HSAs, could create powerful disruptions in existing third- party arrangements. "Stop the HSA Tsunami!!" writes Don McCanne, M.D., President of Physicians for a National Health Program (PNHP), listing the usual objections (www.pnhp.org).

"HSAs and consumer empowerment will be the death of their long-cherished hopes for a nationalized health insurance scheme," writes Greg Scandlen, rebutting PNHP objections (Consumer Choice Matters #42, 12/02/03, see www.galen.org).

Physicians can take insurance reform "in their own hands right now," states AAPS President Mark Schiller, M.D., in a letter to the editor of the Wall Street Journal. "If physicians would require patients to pay at the time of service, we would start to remove ourselves from this quagmire." If his patients wish to use insurance, they can submit his bill themselves for reimbursement while remaining in control.

CPT Codes and AMA Revenue Safe for Now

A little noticed provision of the Medicare expansion, H.R.1, on p. 583, Subtitle E, Sec. 941 (d) reads: "The Secretary shall carry out a study of...systems other than current coding and documentation requirements for payment for physician services" and report to Congress by October 2005.

On Nov. 5, the National Committee on Vital and Health Statistics (NCVHS), as part of its responsibilities under the Health Insurance Portability and Accountability Act (HIPAA), recommended that the ICD-10-CM and ICD-10-PCS be adopted as the HIPAA standard, replacing ICD-9-CM. NCVHS concluded that the benefits would outweigh the significant implementation costs. Only in-patient procedure codes would be affected; CPT-4 would not.

ICD-10 proponents lobbied Congress to include instructions to implement this code set in all settings as part of Medicare reform. The AMA lobbied aggressively to prevent a move to ICD-10 in physician offices.

"The AMA developed CPT codes in 1966, and in an agreement with the Association, the government in 1983 adopted the codes for reporting physician services in Medicare. The AMA generates significant revenue from the licensing of CPT codes," writes Markian Hawryluk (AM News 10/20/03).


"Right to Die" Groups Merge

Last Acts, the beneficiary of 6 years of grant support from the Robert Wood Johnson Foundation (RWJF), has merged with Partnership for Caring to form Last Acts Partnership. An RWJF grant is in process to help transition to multiple funding streams to help support vigorous advocacy for social change.

"The actions of these groups, while helping in many ways to promote better end-of-life care, threaten to sabotage the very best of end-of-life care because `aid in dying' (killing the patient) is incompatible with dedication to provide the very best care till a natural death occurs in its own timing," writes Ron Panzer of Hospice Patients Alliance.


Physician Backlash

In the wake of an 80% reduction in copayments for dual- eligible patients, 58% of New York physicians have considered disenrolling from Medicaid, and 73% from Medicare, according to a survey conducted by the Medical Society of the State of New York (MSSNY's News of New York 11/03).

"As a result of this new state initiative to further enslave physicians, we may see patients crossing the border into Canada to obtain medical care," writes AAPS Director Lawrence Huntoon, M.D., Ph.D., of Lake View, NY.


RIP: Francis Coy, M.D.

Francis M. Coy, M.D., of Orange City, FL, an anesthes- iologist, died on Dec. 1, 2003. For service in World War II, Dr. Coy received the Bronze Star, the Combat Medical Badge, and the Asiatic Pacific Ribbon with three Battle Stars. His medical career spanned 45 years. Dr. Coy served AAPS as National Membership Chairman from 1972-1976 and as a Director from 1974- 1976. He is survived by his son James F. Coy, M.D., who was President of AAPS in 1988 and is currently an AAPS Director and Chairman of AAPS-PAC.


Medicaid Recipients Can Be Billed

The July 2003 Medicaid Update issued by the New York State Dept. of Health announces in a headline that "Medicaid recipients cannot be billed." However, the article reads:

A provider may charge a Medicaid recipient, including a Medicaid recipient enrolled in a managed care plan, ONLY when both parties have agreed PRIOR to the rendering of the service that the recipient is being seen as a private patient. This must be a mutual and voluntary agreement. It is suggested that the provider maintain the patient's signed consent to be treated as private pay in the patient record.

The physician must also notify Medicaid managed-care enrollees ahead of time that "the services may be obtained at no cost to the recipient from a provider that participates in the recipient's managed care plan."

Physicians may not charge privately for ER visits.

"This is the same type of bureaucratic spin that we saw following Judge Politan's ruling in Stewart v. Sullivan," writes Dr. Huntoon. "The Judge found no written rule to prohibit private contracting with Medicare patients, and HCFA continued to forbid it anyway."


Sign Contracts "Just in Case"

In an information sheet for his patients, Robert Shannon, M.D., of Country Doctor House Calls, Bear Lake, MI, advises his patients to sign a private contract with a physician who has opted out of Medicare before they need services.

"You can only sign a contract when you are not sick, or maybe a little bit sick but don't need to be seen right away."

Dr. Shannon offers patients the opportunity to sign contracts, which are valid for two years, at no cost. "Of course, you can still see your regular doctor who takes Medicare, and you are under no obligation to call us ever: but if you have not signed the government contract, and call us when you get sick, we won't be able to see you."

Dr. Shannon charges $35 for a 20-minute home visit, if the patient calls before noon, $45 if before 6 p.m., and $75 between 6 and 10 p.m. Off-hours visits (Sunday, Monday, and when closed for the day) are $95. Longer visits cost extra. A full one-hour visit is only $40 more than the basic charge.


AAPS Calendar

Jan. 16, 2004. Board of Directors meeting, Orlando, FL.
Jan. 17, 2004.
Thrive Not Just Survive IV: Practice manage- ment seminar, Orlando Science Center.
Oct. 13-16, 2004. 61st annual meeting, Portland, Oregon.

AAPS Objects to Language "Guidance"

Although the recently published revision of guidance concerning EO 13166, which requires physicians to provide translation services for patients with limited English proficiency (LEP), supposedly allows more flexibility, the rule is still unconstitutionally vague, stated AAPS in written comments.

The frequent use of undefined phrases such as "meaningful access, reasonable steps, meaningful opportunity, critical services, timely manner," and the like, result in a guidance document that provides no real guidance at all. Recipients cannot establish with reasonable certainty that they have met some entirely subjective standard of compliance in an area such as language that is in constant flux.

The threat of litigation or prosecution adds risk to treating LEP patients. For example, a refugee assistance agency in Maryland distributes the following notice to clients:

"My name is ______. I have limited English skills and require qualified language assistance in _________.

Title VI of the Civil Rights Act of 1964 requires that your office provide a qualified interpreter for me to have equal access to your services. It is a violation of the law for you to require me to bring my own interpreter in order to receive services.

If you have any questions about how to comply with these legal requirements, call the U.S. Department of Justice Civil Rights Division at 1-888-848-5306."

The Office of Management and Budget (OMB) estimates that physicians' offices would incur $156.9 million of the total $267.6 million cost of the LEP Rule.

The AMA calls for federal funding of interpreter services (AM News 10/13/03). (AAPS urges withdrawal of the Rule).


AAPS Supports Aimster Petition for Writ

Can an internet service be completely shut down unless the provider polices every transmission for potential copyright infringement? To impose secondary liability expansively would permit a single copyright holder to hold entire industries hostage, as the Supreme Court has found. What applies to music could also apply to statement and criticism of medical codes. Therefore, AAPS assisted in drafting a Petition for Writ of Certiorari in Deep v. RIAA et al., see aapsonline.org.


Pediatric Testing Requirement Passed

Led by Sen. Hillary Rodham Clinton (D-NY), Congress passed legislation that effectively overturns the victory of AAPS and the Competitive Enterprise Institute in AAPS et al. v U.S. FDA et al. (AAPS News Dec. 2002).

The effect will be to increase drug costs, make guinea pigs of children, and put everyone at risk as the introduction of new drugs is delayed, writes Henry I. Miller, M.D. (Health Care News, 1/03). "It is a disturbing example of Big Brother deciding where private R&D resources are best spent."

Ethical problems in pediatric drug testing have been extensively discussed by Vera Sharav of the Alliance for Human Research Protection ( bioethics.net/in_focus/sharav.pdf and www.ahrp.org/testimonypresentations/FDAmodernization03.html ). The bill contains no protections against exploiting children for profit, Sharav observes.


HIPAA Enforcement

"Given the slow rate of penetration, enforcement may be the only way to spur the industry into compliance," stated Rachel Foerster of Beach Park, IL. If CMS doesn't enforce compliance well, she said, "you might as well kiss [transactions] compliance [goodbye]. You might as well say it is dead."

Contingency plans could phase out in early 2004. But if there is no shift in industry readiness over the next four months, private plans will probably continue to accept old formats, Foerster believes (HIPAA Compliance Alert 11/24/03).

"Sooner or later we're going to have to face [enforcement], a CMS official told Eli Research, but "we're not going to set a date" (Eli Research Compliance Alert, 12/03).

As to the Privacy Rule, Janlori Goldman, director of the Health Privacy Project, complains that the Office of Civil Rights (OCR) has yet to impose even a $100 fine, despite receiving 2,000 complaints. Under HIPAA, the Secretary of HHS has the power to conduct compliance reviews of covered entities. Ms. Goldman believes that OCR is "abdicating its responsibility" by its failure to seek out violators, instead relying on consumers to make reports.


WSMA Protests Proposals to Seize Property

The Washington Dept. of Health has proposed changes to the Uniform Disciplinary Act that would permit it to enter a physician's office and seize property, such as computers, totally disrupting a practice. Also permitted would be self-executing orders that could impose a final action without a hearing.

The Washington State Medical Association (WSMA) strongly opposed these amendments at a November "work group" meeting: "The notion of health care professionals, or any class of citizens, giving up their due process rights because of a few undocumented instances is poor public policy and contrary to the very principles upon which this country was founded" (WSMA Membership Memo 12/5/03).


Four Stages of Marxist Systems

An economic system based on the Marxist Labor Theory of Value ignores market information and fixes prices in an attempt to achieve a predetermined result. Medicare and Medicaid are examples. All such systems have failed and will fail. There cannot be a rational allocation of resources when participants are rationally ignorant because they are not responsible for the consequences of their actions.

The stages of failure are: (1) a New Economic Policy; (2) shock workers; (3) show trials to root out "wreckers and saboteurs"; and (4) purges.

In Medicare, we have seen (1) DRGs and CPT codes; (2) fee cuts under the Resource-Based Relative Value Scale; (3) prosecutions for "fraud and abuse." What will happen when patients can't find a physician to care for them, or when the system runs out of funds to pay claims?

The "most important change which extensive government control produces is a psychological change, an alteration in the character of the people. This is necessarily a slow affair, a process which extends...perhaps over one or two generations.... [E]ven a strong tradition of political liberty is no safeguard if the danger is precisely that...policies will gradually undermine and destroy that spirit."
Friedrich Hayek, The Road to Serfdom


The "Right" Number. According to a New York State Health Department official, the government is poised to begin regulating specific surgeries, producing "report cards" for hospitals that include the number of procedures done. Carotid endarterectomies are the first target.

Academic physicians at large institutions will probably be fully cooperative with this government initiative. Hospitals that meet arbitrary frequency parameters will be declared "Centers of Excellence," and others will be labeled as providing substandard care. It is far easier to ration care and thereby control costs if supply is limited. It is far easier to regulate a small number of compliant sheep than a large number of independent entities.

Although volume and morbidity and mortality statistics are important in selecting surgeons and hospitals, patients and their referring physicians need to be in control of making the choices. Timeliness and access may be of equal or greater importance as for acute stroke when there is only a three-hour time window for administering t-PA. Steering patients to urban centers will also cause rural physicians to lose their skills.

We have learned from prosecutors that if a physician performs "too many" of a particular procedure, he becomes a prime target for investigation (the outlier outlaw concept). If he performs too few, he may be labeled "substandard." Picking the "right" number will be left to medically incompetent bureaucrats whose choice will be guided by a global budget. As this equation regresses, the "right" number may be zero.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY


Limiting Supply. The AMA achieved its objective of a "uniform elevated standard of requirements for the M.D. degree" by getting control of licensing and accreditation of medical schools. I have a letter from the Illinois Health Department stating that the AMA accredits medical schools; I had written for the requirements to start a for-profit school. Illinois has not had a new medical school for more than 20 years. By the way, the Carnegie Foundation along with the Council on Medical Education a creature of the AMA backed Flexner's report [see J Am Phys Surg 2003;8:37-40].
Charles Courtney, La Grange, IL


Who's Responsible? Who held a gun to the heads of doctors, labs, and hospitals and forced them to join PPOs? For a truly bad idea to be successful, it must have supporters. Is it the "evil" insurance companies that should be tarred and feathered? Or those who joined in, thinking it would be a gravy train, with the insurance company sending them patients and dollars?
Danny M. O'Grady, CLU, Midland, TX 

Artificial Shortages. HMOs do not negotiate with doctors; they dictate. They present a take-it-or-leave it contract, and when they get "enough" doctors, they close the panel. If there are only enough surgeons to do 75% of the needed cholecystectomies, they save 25% on that operation.

HMOs, of course, do not do well when they actually have to give care. I saw a report about the Kaiser HMO on the left coast that stated that if Kaiser were to provide all the annual physicals it had promised to members, it would take 2.5 years, providing it did nothing else during that time.

Even Stalin learned from killing the Kulaks that artificial shortages do not lower prices or increase availability.
Stephen Katz, M.D., Fairfield, CT


An Offensive Question. I asked the head of a New York Times regional bureau whether people should receive medical care that costs more than their lifetime earnings. She squirmed and didn't or couldn't answer. She agreed that she didn't want to equate money and medical care so directly. So I asked the second question: "How many people can we treat without regard to their lifetime earnings?" And who should decide?
Philip R. Alper, M.D., Burlingame, CA


Whom Do You Trust? Do you really want to trust [medical decisions] to people who suspend kindergartners for using finger guns or who herd hysterical sixth grade girls into a room, block access to their parents, and force them to undergo pelvic examinations by an imported doctor who was supposedly checking for sexual abuse? Or the folks who threatened to take a child away from his parents when they informed a counselor that they were going to try a Ritalin holiday because of their child's weight loss and mood changes?
Linda Gorman, Englewood, CO


The Double Standard. Partially free-market entities including Enron, Tyco, and WorldCom have been brought to heel. The IRS, however, got away with blatant libel, using supposedly confidential information to smear an innocent taxpayer (William Simon) in the middle of a gubernatorial campaign. This abuse of federal power did not even rise to the level of "poor judgment" (Wall St J 8/27/03). But the average citizen continues to grant a halo effect to government despite repeated gross malfeasance that dwarfs any and all corporate crimes.
Robert P. Gervais, M.D., Mesa, AZ


Time for Rebellion? The majority of seniors want choice but are forced into Medicare. Maybe it's time for them to opt out of Medicare and demand that Congress give them their equivalent dollars to buy insurance or pay cash to doctors.
Joseph Lee Pugh, Diamondhead, MS

Legislative Alert

The Big New Medicare Law

On December 8, the President signed the Medicare Modernization and Prescription Drug Act of 2003.

The good news is that the law contains a provision, Title XII, that has nothing to do with structural changes in Medicare: the creation of the new Health Savings Accounts (HSAs), a new and improved version of medical savings accounts (MSAs), which will be available in 2004. This is a major change in the structure of the commercial health insurance market. Now, at last, Americans will see a real market test of the concept.

Then, there is the not-so-good news. The HSAs have come at a very high price. With the addition of a universal prescription drug entitlement, the bill is the largest single expansion in the history of the Medicare program. While the Congressional Budget Office (CBO) has initially estimated the costs of the bill at $395 billion over ten years, these preliminary estimates only constitute a down-payment on the drug entitlement, and the program will face rapidly rising costs in years to come, particularly when the baby boomers start to retire.

The story of how the Medicare conference report passed the House and Senate is already passing into the realm of dark legend; the House episode is unprecedented. One thing is clear: no one can claim that this is a product of congressional consensus; it is a reflection of deep congressional division, both between and within both political parties.

As the press reports have made abundantly clear, this was not the finest hour in the patchy Congressional annals of good government. The big package 1,100 pages of legislative text and explanatory conference language was only available to Members of the House for a 28-hour period. Merely reading it was virtually impossible except for especially gifted speed readers. Moreover, large chunks of it are simply impenetrable to ordinary folks. As one Capitol Hill observer noted, reading the legislative text was like trying to slog through an owner's manual for the Space Shuttle.

House Drama

On November 22, at 3 a.m., the Medicare bill was failing by two votes: 216 to 218. The standard 15 minutes for the vote had passed. So, the congressional leaders decided to keep the vote open. By 5 a.m., opponents of the bill were still winning 216 to 218, and conservatives who wanted real free-market competition were not budging. In a desperate search for the magic number, the House congressional leaders held the vote open for almost three hours, having the President make selected calls and otherwise trying desperately to get conservative Republicans to change their minds. Finally, Reps. Butch Otter (R-ID) and Trent Franks (R-AZ) were persuaded to go along. The final vote, just before 6 a.m., was 220 to 215.

But there is a remarkable story here. Twenty-five conservatives, led by Rep. Pat Toomey (R-PA), held to the line they had drawn in the sand and voted no. They defended the principle of limited government throughout the wee hours of the morning of November 22, the anniversary of the death of President John F. Kennedy, author of Profiles in Courage: a book about men of both political parties who demonstrated political courage, willing to sacrifice their political fortunes rather than bow to powerful interests.

Senate Spectacle

In the Senate, after escaping a filibuster threat led by Senator Edward M. Kennedy (D-MA), the Medicare conference report passed on November 25 by a vote of 54 to 44. Kennedy's planned filibuster, briefly energized by the doings in the House, could not be sustained, and neither could points of order on procedural grounds.

The Explosive Cost Issue

Just before the House and Senate votes, the CBO estimated the cost of the bill at $395 billion over ten years, but stated that this was simply a preliminary estimate. The CBO staff had not had the time to go through the legislative language. In his November 24 speech opposing the bill, Sen. Judd Gregg (R-NH) said: "This is a $400 billion subsidy over the ten years that it exists, but over the actuarial life of the program, it is a $7 trillion subsidy $7 trillion. It is not paid for." According to The Washington Post, the CBO staff told congressional leaders that the big cost increases would really start in the second ten years of the drug entitlement, and could reach up to $1.7 or even $2 trillion!

Senator Jeff Sessions (R-AL) and 13 of his Senate colleagues were concerned that the CBO estimates would turn out to be larger, and argued for serious cost containment provisions in the final bill. In a November 11 letter to Sen. Charles Grassley (R- IA), chairman of the Senate Finance Committee, Sessions et al. wrote: "If the actual program costs exceeds the budgeted amounts, the program should provide for an automatic cost or premium adjustment to keep it within budget amounts. This is the only kind of cost containment mechanism that will work. If Congress decides that the plan needs more money, that can be done, but we should not create an uncontrollable monster that will devour the bulk of our health care dollars." Needless to say, Sen. Sessions didn't get that kind of provision.

Devils and Details

Technical details include transferring the drug coverage of dual-eligible beneficiaries from Medicaid into Medicare and blocking the 4.5% cut in physician payment scheduled for 2004. (Doctors will get a 1.5% increase in 2004 and 2005.) The new law also provides for changes in Medicare supplemental insurance, state pharmacy assistance programs, risk-adjustment mechanisms by private plans, payment calculations incorporating coverage of Dept. of Defense and Veterans Administration populations, new preventive services under Medicare Part B, changes in the Part B premiums and deductibles, tax-free subsidies to corporations, the creation of a prescription drug card program beginning in 2004, and numerous changes in Medicare regulation and administration. While the law will be extensively examined to yield a lot of intended and unintended consequences, the key provisions are pretty clear.

Title I provides for a universal drug benefit under a new Part D of Medicare, beginning in 2006. Beneficiaries will be eligible for a voluntary stand-alone drug benefit, available either through prescription-drug plans or Medicare Advantage plans. The coverage is to be standardized. The initial Benefit will cost $35 per month, with a $250 deductible. The premiums and deductibles are indexed to grow. In 2011, for example, the baby boomers will pay an estimated premium of $588 and a deductible of $380. Under the initial benefit, the taxpayers will pay 75% of the costs of the benefit up to $2,250. The out-of-pocket "doughnut hole" is set at $2,850. (In 2011, that gap is projected to be $4,315.) In 2006, the catastrophic coverage will be triggered at $5,100 in total drug spending per beneficiary; in 2011, at $7,715.

Title II provides for a new competitive system beginning in 2006. Under Section 221, the Secretary of Health and Human Services (HHS) will set up a system of regional health plans for the new Medicare Advantage (MA) system beginning in 2006, and the MA plans must cover the entire region. The Secretary is given authority to establish anywhere between 10 and 50 regions in the country. And in so doing, he is ordered to do a market survey and to maximize availability of regional plans. The Secretary will also authorize a national plan, if a plan wants serve all regions on a national basis; this could be modeled on the current nationwide Federal Employees Health Benefits Program (FEHBP). This is, at least, an improvement over the House and Senate bills, which would have forced plans to conform to a rigid geographical requirement.

The required benefits standardization is incompatible with

free-market principles of consumer choice and competition.

Section 233 of title II provides for continuing the Medicare medical savings accounts (MSAs); however, it imposes Medicare payment rates on MSA plans, also incompatible with free-market principles.

Title lI also provides for a premium support demonstration program beginning in 2010. The conference report language changes the name of the competition system from "premium support" to "comparative cost adjustment" and restricts the demonstration to six metropolitan areas over a period of six years. The premium support provision was the central core component of genuine Medicare reform, which was scuttled in the final bill.

Medicare demonstration projects focused on competitive pricing have a rich history of failure, often being subverted by local interests that oppose price competition. In his November 24 Senate speech in defense of the legislation, Sen. Max Baucus (D- MT) told his Democratic colleagues not to worry about the threat of private sector competition in 2010: it will be repealed. If the demonstration project ever gets off the ground a big if it will be limited. According to the Office of Management and Budget (OMB) there are currently 370 Metropolitan Statistical Areas in the U.S. and Puerto Rico. Premium support will be tested in no more than 1.62% of them.

Title IX provides for various regulatory and administrative changes. The title contains a variety of rule changes and administrative changes, and many of them are welcome, simply because they reflect a final triumph of common sense.

Section 902 sets a 3-year deadline for the issuance of final Medicare regs, except under "exceptional circumstances." Whether this is a good thing or a bad thing depends, of course, on the regs themselves and whether one thinks, on the basis of painful experience, that a speed up in the Medicare regulatory process is desirable. Often it would be just was well if many of the proposed and final regs never saw the light of day. So, this section could be a wash.

In Section 903, Congress finally agrees in principle that Medicare regulations should not be "retroactive," unless, of course, the imposition of such a rule is necessary for the agency to comply with statute or to further "the public interest." Such application, with or without the statute or for any reason, appears to anyone with the most rudimentary acquaintance with the textbook basics of American civics to constitute an ex post facto law making a law today and applying it to an act or practice that had occurred yesterday. Such laws are flat out unconstitutional.

Section 903 protects doctors who rely on official guidance from HHS or the Centers for Medicare and Medicaid Services (CMS) from sanctions and from having to reimburse Medicare. It does not protect doctors from such sanctions in the event of a clerical error.

Section 900 was to create an independent, market-friendly agency to run the competitive plan. This was junked, leaving the existing Medicare bureaucracy in charge, even though it is one of the most poorly functioning agencies in Washington.

The Winners and Losers

It's quite an achievement to blow a hole in the budget, threaten current and future tax cuts, displace millions of seniors from their existing private drug coverage, and earn the very fleeting support of the AARP. The winners are: low-income seniors without drug coverage; companies who can look forward to scaling back or dropping existing retiree coverage; companies in line for $71 billion worth of tax-free subsidies if they don't cut back retiree coverage; champions of increased power for the Medicare bureaucracy; rural health care providers; and, of course, left-wing advocates of entitlement expansion. In the short run, Republican politicians, doctors escaping impending Medicare payment cuts, and drug companies with the prospect of increased volume of sales through the Medicare entitlement, are also winners.

The losers are: middle-class retirees with solid private employer-based drug coverage; union retirees with generous private drug coverage; retirees with coverage through state and local government employee plans (particularly in those states facing the biggest budget shortfalls); and all current and future taxpayers, particularly those under the age of 30; fiscal conservatives and advocates of the original market-based Medicare reform. In the long run, doctors still locked in Medicare's unreformed system of administrative pricing, and drug companies, facing future price controls, will also be losers.

Next Month: More fallout from this explosion.

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