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

Volume 61, No. 1 January 2005


All insurance is, fundamentally, a form of asset protection. Subscribers pay a premium; insurers promise to pay an indemnity in the event of a loss. The premium depends on the risk of the event and the expected payout.

Does Professional Liability Insurance Exist?

During the "malpractice" crisis in the mid-1970s, it became apparent that professional liability was not an insurable risk, as the payouts could not be actuarially predicted in an age of runaway litigation and escalating awards. As physician-owned companies ("bedpan mutuals") arose, coverage shifted from "occurrence" the standard form of insurance to the newly introduced "claims-made" policies.

Like Medicare and Social Security, claims-made policies are a pay-as-you-go system. Whenever obligations rise (or perhaps as investment income decreases), premiums escalate and doctors are trapped. The instant they stop paying, they are, in the absence of tail or nose coverage, uninsured for all prior acts even during times that they were paying enormous premiums.

The public is probably not aware of this situation (and would find it bizarre). But the trial bar understands very well. It can guard against a doctor simply dropping coverage and leaving a state such as Illinois, which has unaffordable premiums. The doctor can't start fresh in a low-premium state such as Iowa and obtain hospital or managed-care credentials without prior-acts coverage. Institutions can apparently be held liable for judgments based on those out-of-state prior acts if they credential the physician.

What About Caps?

A number of states have placed caps on noneconomic damages, and President Bush favors a federal law that would override state laws or even state constitutions that forbid damage limits. The latter raises federalism concerns, as well as the prospect of federal regulation of medicine. There is also the concern that caps really don't solve the problem.

In fact, there is already a cap on most malpractice awards: the limit of insurance coverage. A "high-low" agreement is often struck by litigants before the case ever goes to the jury. Insurers insist on a confidentiality pact concerning the amount that actually gets paid, which may be only 5 to 10% of a huge jury award. The publicity attendant on the $100 million award sets benchmarks for future awards (Wall St J 11/30/04 ) and helps to sell policies with higher limits.

Three Strikes

As doctors begin to fight back with limits on lawyers' compensation, as in the initiative that passed in Florida, the lawyers have retaliated (AAPS News, Sept 2004). More than 70% of Floridians voted for a three-strikes law "aimed not at killers and thieves but at doctors who foul up," as described by an Associated Press story. The measure is now held under a temporary restraining order. Attorneys for the Florida Hospital Association, which asked for the TRO, said it is unclear which doctors should have their license revoked, who should oversee enforcement, and how Florida should handle a doctor whose incidents occurred in another state or nation.

The very words "committed malpractice" imply that a doctor knowingly or recklessly committed a criminal act against a patient victim. While crimes have a statutory maximum penalty, in the majority of states malpractice does not. And while crimes are supposed to require a mens rea, the doctor's intention was almost always to help a patient.

The Ultimate Effect

While the original idea of malpractice insurance may have been to provide a means of compensation for patients injured by a definite medical error, the current system shifts much of the risk of death, sickness, and disability onto those who fight against these inevitable natural events. The trigger for payout is a violation of the "standard of care" according to some convincing "expert." The overhead is enormous, perhaps 70%.

Doctors, to the extent that they cannot pass the cost of liability through to patients, are the indentured servants of the system. Patients not only pay higher medical bills and insurance premiums, but are increasingly unable to do anything (such as have a vaginal birth after Caesarian section) at their own risk. They too are trapped by a "standard of care" which could turn out to be harmful, especially in their case.

The Final Solution, as for all other problems, could be a government takeover. With all doctors and patients owned by the state, the state is responsible for the outcomes. And the state has the ultimate protection of sovereign immunity.

Is There Any Escape?

As John Hoelscher, M.D., of Madison County, IL, pointed out: "if you must profit from the death of a loved one, there is a better way that cuts out the middleman attorney. It's called life insurance." There's also sickness and disability insurance and potentially the equivalent of "uninsured driver" insurance. And if the constitution prohibits limits on awards, there can still be limits on asset seizures or on the definition of a tort (as by expanding Good Samaritan laws to emergency treatment in the hospital).

By buying "malpractice" insurance, doctors have accepted the shifting of enormous risks over which they have no control. Many wealthy parasites feed on this system and will not relinquish their position willingly. But what if a critical mass of physicians were simply to say No? Lock us out and hire PAs or let us off the merry-go-round.

What About Handicapped-Baby Insurance?

Any couple that has a child faces the possibility that the child will be disabled and require costly lifelong care. Why should this risk be shifted from the population of parents onto the tiny group of obstetricians? It is argued that greater vigilance, or a quick C-section, might have averted a tragic outcome but obstetric advances and a five-fold increase in C- sections have had little effect on cerebral palsy rates.

Prospective parents should buy insurance prior to the event. They would avoid the uncertainty, delay, and agony of bringing a lawsuit, and would be indemnified even if their doctor's care was flawless. The premiums should depend on the risk: such as the age of the mother, the abortion history, the prenatal care, the choice of birthing facility, and the prior medical history none of which are under the doctor's control. The parents could also choose a more generous payout by paying the commensurate premium.


Better Ways to Spend the Malpractice Premium

Most patients would prefer a better outcome to a malpractice award. And about 80% of the public believes that giving doctors more time to spend with patients would reduce medical errors (Kaiser Daily Health Policy Report 11/18/04). What if, instead of spending a huge chunk of money on liability insurace each year (up to $277,000 per year for obstetricians in Florida), doctors would: (1) put money into a special account to be used to compensate patients voluntarily in the event of an error; (2) take on fewer patients and spend more time with each one; (3) hire highly qualified nurses to double-check records, follow up with patients, do literature searches, and maybe even sit with women during labor?

Shouldn't patients have the choice? They could see a deep- pocketed, probably institution or managed-care doctor who participates in the lawsuit-lottery system and follows protocols or assume their own risk by buying bad-outcomes insurance, making contractual agreements with their physicians, and participating actively in decisions about their own care? Consumers need to demand such insurance, and legislators need to identify and remove any obstacles to its development.


Hospitalists: More Fallout from Liability

According to the Society for Hospital Medicine, virtually all leading hospitals now use hospitalists. If "quality indicators" such as [short] length of stay are found to improve with hospitalists, their use could become a performance expectation required by law (BNA's HCFR 11/24/04). The program is now "voluntary," but continuity of care and a "divide" between inpatient and outpatient physicians are issues of concern.


Why Lawyers Should Worry More than Doctors

Physicians lose sleep because of a rare horror story about a colleague losing all his personal assets or a medical office losing part of its accounts receivable. Yet there is little a personal-injury attorney can do to collect against defendants who have assets in a limited liability company (LLC), writes Roccy DeFrancesco (Physician's Money Digest 10/15/2004). Lack of liability insurance or low limits ($500,000 or less) is a "lawsuit repellent." If there were no insurers to cut checks, most PI lawyers would have to find another line of work.


What You Can Do to Support AAPS

President-Elect Kenneth Christman, M.D., of Dayton, OH, reports that a number of members have asked for ideas on spreading the AAPS message. He offers the following:

1. Try to arrange speaking engagements for Drs. Orient or Huntoon or General Counsel Andrew Schlafly.

2. Offer a free membership and AAPS literature to any medical students who may rotate through your office.

3. Encourage the formation of student chapters.

4. Plan to attend the 2005 meeting and invite friends.

5. Carry AAPS literature with you (and anti-Single Payer Petition cards) to give to colleagues.

6. Become involved in county, state, and national organizations and promote freedom for patients and doctors.

7. Support AAPS financially, and also the American Health Legal Foundation and the Nino Camardese Scholarship Fund. I plan to pay double dues this year ($650).

9. Remember AAPS in your will.


How to Get Through to Your Congressman

AAPS government affairs consultant Jack Strayer writes that while responding through an e-mail alert is good and convenient, this should not replace the old-fashioned personal letter. Remember, however, that mail to Capitol Hill is delayed for weeks while being screened for anthrax and other biotoxins. It is preferable to mail the letter, or at least a copy, to the district office. Five or six phone calls in one day to a district office on the same subject cause the office to go into crisis mode. District staff, being unused to this, call the Washington office to describe a "deluge" of mail and phone calls. Many groups are using this angle; it seems to work.


Shining Scalpel Awards

At the 2004 meeting, Pittsburgh Post-Gazette reporter Steve Twedt and AAPS public affairs counsel Kathryn Serkes were honored with the AAPS Shining Scalpel Award, in "recognition of outstanding service to Americans in cutting through the jungle of misinformation to reveal the truth."


Fighting Malaria

A number of AAPS members have signed onto a letter to President Bush from Roy Innis, National Chairman of the Congress of Racial Equality (CORE), on the use of effective measures such as DDT to fight malaria in Africa. See www.aapsonline.org/ddt.htm. More signatories are needed!


AAPS Calendar

Jan. 21, 2005. Board of Directors meeting, Houston, TX.
May 21, 2005. Board of Directors meeting, TBA.
Sept. 21-24, 2005. 62nd annual meeting, Arlington, VA.

Improved Patient Waiver Posted

A simpler, more patient-friendly, more legally thorough sample patient waiver form is now posted on the Members-Only section.

A member reported that a lawyer for a worker's compensation patient called and informed her that the waiver would not stand up in court. He is already suing the patient's employer. He was very rude.

"The waiver has a powerful screening effect," writes AAPS General Counsel Andrew Schlafly. "It deters lawsuits much as gun ownership deters crime. That rude attorney is annoyed by the waiver because there is a chance that some of it may be upheld in court. He doesn't like the fact that patients who sign the waiver are less likely to sue. He'd rather target doctors who are defenseless. Moreover, the person who complained is now known to you as a potential problem. You can discharge him or be more cautious."

Mr. Schlafly reports that the only complaints he has heard about the waivers come from malpractice attorneys.


Mediation Often Prevents Litigation

About one-third of the 36 or so malpractice cases involving Rush University Medical Center in Chicago each year are mediated. More than 90% of mediated cases settle, usually within 4 months, at about 50% of the cost of litigation. Parties communicate directly, in an atmosphere stressing accommodation and resolution. Whatever is said is not discoverable and cannot be used if litigation occurs later (Ocular Surgery News 7/15/04).


Cost of Excess Coverage Rises

Indiana has tort reform, but is still losing obstetricians, who can't afford the 72.6% increase in the amount they are forced to pay into a patient compensation fund to cover awards that exceed their liability coverage. Indiana recently raised its cap on economic and noneconomic damages to $1.25 million. Preventing an increase in the caps is a constant legislative battle in the various states that have them. And while premiums may be lower in states like California, they are nonetheless becoming unaffordable as fees are frozen (AMNews 8/16/04).


Physician Liability Expanded to Non-Patients

Continuing a trend towards expanding physicians' legal duties, the Arizona Supreme Court held that physicians have duty of care in situations in which no traditional patient-physician relationship exists [Stanley v. McCarver, 2004 Ariz. LEXIS 71 (2004)]. In this case, a radiologist reading a pre- employment film did not inform a patient directly of a nodule and signs of pneumonia. Nor did the employer, in violation of its own policy. The plaintiff was later found to have lung cancer. The Supreme Court noted a trend in other jurisdictions and concluded that public policy is served by imposing a duty, to help prevent future harm. This decision effectively overturns previous decisions, such as Hafner v. Beck, which rejected a malpractice claim against a psychologist who had performed an independent medical examination. Snell and Wilmer of Phoenix advises physicians to check their liability policies for coverage of such claims, and to consider allocating responsibility for informing patients in contracts with third parties.


Dr. Sell Denied Trial; Tapes Show Abuse

The trial of Charles Thomas Sell, D.D.S., scheduled to begin Nov. 29, was cancelled, and he was once again sent to a government psychiatrist for the apparent purpose of declaring him incompetent. He is said to be too focused on mistreatment experienced in the prison hospital to be able to concentrate on his legal defense. According to a report by his defense psychiatrist, the sealed videotapes do indeed show the very abuse that he alleged, such as being forcefully sprayed with scalding water. Dr. Sell has now been imprisoned for nearly 8 years without trial (AAPS News August 2004; News of the Day Archive 11/25/04, www.aapsonline.org).


You Are Responsible for Consultants

Following a consultant's advice on compliance with federal rules does not protect a physician against liability if the information is false. Before hiring a consultant, check his credentials, the OIG exclusion list, and the experience of colleagues. Beware of consultants who offer to work for a percentage of increased payments. Verify advice with an independent source before acting upon it (MCA 22/33/04).


Medicare Carrier Sued

A Florida medical billing company, targeted in a False Claims Act lawsuit for billing for $122 million worth of durable medical equipment, filed a complaint against Palmetto GBA for failing to detect the fraud. Incredibly, 1,200 Medicare beneficiaries had filed complaints against DME companies, stating that they had never received any supplies, and the majority of the companies were fictitious. Nevertheless, the carrier kept paying the bills (BNA's HCFR 11/10/04).


OIG to Investigate HIPAA Compliance

While the Office of Civil Rights has carried on a passive, complaint-driven HIPAA enforcement process, the new Work Plan for the HHS Office of Inspector General includes internal uses, disclosures, and amendments of health data. OIG "can go wherever it wants," and "OIG will almost certainly find inadequate documentation wherever it looks," says attorney Mark Lutes (HIPAA Compliance Alert 11/8/04). The 2005 OIG Work Plan, posted at oig.hhs.gov/publications/workplan.html, specifically refers to "HIPAA covered entities."


Charity, Kickbacks, or Inducements?

Medicare does not force hospitals to seize the homes of patients with bad debts ( www.cms.hhs.gov/FAQ_Uninsured.pdf); however, there are rules for non-opted-out physicians and facilities to follow to be sure that charitable allowances do not fall into a forbidden category. There must be consistent standards for granting a waiver of copayments, and one designated person with authority to grant a waiver. Patients must provide information such as tax returns, check stubs, and employment status. Documentation of need must be maintained, and continuing qualification must be verified (laminated checklist from Medicare Compliance Alert; for federal poverty guidelines see aspe.os.dhhs.gov/poverty/03poverty.htm). Note that pursuit of anti-kickback violations is a part of the 2005 OIG Work Plan.


EMRs Not Good Medicine. Although electronic medical records are often touted as the digital magic that will improve quality and reduce medical errors, my own experience completely contradicts this theory. I am often asked to review records of various physicians and hospitals across the nation. I can always tell which ones were generated by an EMR system. These are unquestionably the worst records for efficiently conveying accurate, clinically relevant information.

The standardized nature of EMRs is clearly centered on the payment system. The primary purpose of the standardized wording, paragraphs, and bullet points is to show that the service qualifies for a specific CPT code. EMRs have degenerated to the point that the printouts tend to resemble standardized nursing care plans rather than accurate physician progress notes. One wonders how much of what was recorded was actually done. Often, the EMR system-generated notes totally contradict "comments" in the very same progress note!
Lawrence R. Huntoon, M.D., Ph.D.


The Trouble with "Best Practices." We don't mass produce people, and what works best for me may not work for my elderly Aunt Mary who drinks. Moreover, in a mass production setting such as the one envisioned by Newt Gingrich, you merely discard the widgets that don't exactly fit the production model. Need examples? Study the "eugenics movement" of the 1930s or the "healthcare system" of the Nazis.
Stephen R. Katz, M.D., Fairfield, CT


Computer-Generated Advice. Computers do very well for narrow tasks like calculating electrolyte replacement. But when carriers use prescription data to infer diagnoses and "offer suggestions" for "best practices," I find reviewing myself records, only to discover either that I was already doing what was suggested, or it was inappropriate under the circumstances.

Data collection with feedback loops involving physicians was formerly called clinical research; grant funds covered the costs. The delusion has developed that this is a normal aspect of practice that doctors should subsidize. Still more delusional is the idea that it will "help" the physician do his job.
Philip Alper, M.D., Burlingame, CA


Who Decides "Best Practices"? I fail to see how endless committee meetings that debate best practices will disseminate information about clinical advances any faster than the current system of journals, specialist referrals, and professional meetings. In behavioral areas, best practices seem to reflect a committee wish list for social change. If they become a safe harbor for protection against professional liability, innovations will be politicized and scrutinized for Medicare/Medicaid "cost- effectiveness" and the message that they send to the benighted population. Physicians will become another arm of the politically correct establishment.
Linda Gorman, Independence Institute


EMRs Not a Panacea. Politicos and other members of the chattering classes seem to think that all physicians need is more information. If I don't already know something about a patient with a chronic illness, I know where in the chart to find it. If I refer a patient, I give the receiving physician a distillation of relevant information. For physicians in mid-career, much of diagnosis is intuitive, from information gleaned from looking at the patient, not a computer screen. Newt needs to coat-tail a physician who has not been squeezed into a bureaucratic ball.
Robert Berry, M.D., Greeneville, TN


On Government "Mental Health Screening." Psychiatry has been taken over by the drug companies, as Dr. Leon Mosher pointed out in his resignation from the American Psychiatric Association. The new screening multiplies the danger, as "experts" are entrusted with "diagnosing" allegedly mysterious and dangerous "disorders" that are invisible to the rest of us.

However we define "mental illness" and the definitions vary wildly and unscientifically careful, painstaking examination is required to diagnose it. The notion that brief "screenings" can uncover it resurrects the medieval witchhunt, which used spots on people's skin to "diagnose" those who were "compacting with the Devil."
Nathaniel S. Lehrman, M.D., Roslyn, NY


A Definition of Case Management: Pseudo-trained semi- professionals apply subjective interpretation to a mixture of subjective and objective data retrospectively, without first- person assessment, then quantify and qualify such data to delineate the appropriate response to the physician in charge of the patient's care. Their recommendation approximates the appropriate therapy for the average patient reviewed. It may be challenged by the physician, providing that he can provide an objective, well-referenced argument to justify his view.
Vern Cherewatenko, M.D., Renton, WA


A Definition of Politics: As Mark Twain wrote: "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies."
Steve Barchet, M.D., Issaquah, WA

* * *

"In our time, political speech and writing are largely the defense of the indefensible."
George Orwell, "Politics and the English Language"

Legislative Alert

Bush Takes Command

In the field of medical policy if only because of the enactment of the Medicare Modernization Act of 2003 President George W. Bush may prove to be the most consequential President since Lyndon B. Johnson.

While conservatives are properly unhappy over the largest entitlement expansion since the Great Society the Medicare drug benefit they also recognize that Bush has laid the groundwork for a transformation of the health insurance market with the health savings accounts (HSAs).

Outside of his legislative initiatives, Bush has also opened or expanded rural and community health centers, granted waivers to states to use Medicaid and SCHIP funds to pursue innovative health coverage options for low-income families, and implemented new HHS rules to lower prescription drug costs. Beyond these administrative changes, the Bush Administration produced a very impressive report on the state of competition in the medical sector, the work of staffers at the Department of Justice and the Federal Trade Commission. The conclusion: American medicine is in desperate need of more competition.

The White House has outlined an ambitious second-term agenda: Further expand HSAs, including a tax credit to help small business employees; a new above-the-line deduction for health insurance premiums for high-deductible health plans; a proposal to allow small businesses to establish association health plans and to expand association health plans to individual membership; and a proposal to allow individuals and families to buy affordable medical coverage across state lines.

The White House has also said that it will press for further expansion of community health centers, the promotion of health information technology, the enactment of medical liability reform on the federal level, a new tax deduction for long-term care insurance, and additional tax exemptions for home caregivers who take care of aging family members.

Tax Reform

Bush has already announced that aside from Social Security reform and medical liability reform, he wants to preside over a massive overhaul of the federal tax code. This is Really Big Stuff. Depending on what form his tax reform proposals take, the Bush tax reform initiative would almost certainly have a profound impact on American medicine.

Thus far, the White House has been speaking in generalities on this topic, but has said that the agenda is to keep taxes low while reforming the entire system. This means making the tax cuts enacted in 2001 permanent, and making the tax code itself "fairer, simpler and pro-growth." Does this mean that Bush is going to come out and support a repeal of the existing income tax in favor of some sort of a flat tax proposal? Some form of consumption tax or value-added tax? What will be the fate of the existing panoply of personal and business tax credits, deductions, and tax exclusions, including business deductibility for health insurance and employee tax exclusions on health insurance benefits?

Tax policy generates a huge lobbying industry. Washington is swimming in tax lawyers and lobbyists. They have a huge stake in the current system. You can expect them to line up to fight any serious tax reform.

The key player in this tax reform debate will be the strong- willed Bill Thomas (R-CA), Chairman of the House Ways and Means Committee. In public speeches and commentaries on the topic, Thomas has already advocated a major tax overhaul of the treatment of health insurance, and has said that he would like to see the current tax breaks for employment-based health insurance approximately $188 billion in 2004 replaced with a new system of individual tax relief for health insurance, including the purchase of HSAs. Rep. Jim McCrery (R-LA), another recognized expert on health policy and a regular ally of Thomas, is another champion of this bold approach.

Remarkably, the idea of ending the current tax treatment of medical care is getting favorable play in unexpected corners. Sebastian Mallaby writes: "But tax sheltered corporate health care is unfair and wasteful. People at small companies and temporary and unskilled workers often get no coverage. Meanwhile, privileged workers get coverage that is overly fancy because it is subsidized by taxpayers and doubly wasteful because it separates the decision to spend money from the responsibility for paying. So long as the bill is on the company, the doctors and patients who make medical choices have no incentive to constrain spending" (Wash Post 11/22/04). Exactly.

The idea of a universal tax credit is certainly compatible at least in the general policy direction with the more limited Bush initiatives of a refundable tax credit for low- income folks without employer-based coverage. The Bush proposals are modest in size, roughly $90 billion over ten years to cover the uninsured. Urban Institute analysts Jack Hadley and John Holohan, however, estimate that taxpayers already pay out in 2004 dollars $40.7 billion for the uninsured, one way or another, and that the public funding for that care amounts to $34.6 billion, meaning that 85% of the costs of the uninsured are already paid through some form of government funding. But the big political question is whether Congress and the White House will go that far. It would be a big step.

Another very real possibility is that President Bush, Rep. Thomas, and other Congressional tax reformers might put a cap on the tax exclusion of employer-based health benefits at some level, generating new revenues that could help to finance a more aggressive and expansive tax-credit system. Individual tax relief for medical care is the structural component of a new system of individual choice, and individual choice forces robust competition among insurers, doctors, and other medical professionals. A combination of tax reform and Bush's various initiatives could produce a very new and different world. A better world for doctors and patients alike.

Meanwhile, Back to Medicare Central Planning

For the New Year, the Bush Administration is going to unveil the long awaited prescription drug regulations to implement the new Part D of the Medicare program, the Medicare Prescription Drug Program. The entitlement is to go into effect in 2006; the regulations are expected in 2005.

This is going to be a difficult business. The reasons are not hard to fathom. Congress designed the Medicare drug benefit. It does not reflect current market realities; it simply displaces them. According to a recent study conducted by Pricewater- houseCoopers for the American Association of Retired Persons (AARP), of the projected $407 billion in the new Medicare law over the period 2006-2013, only $70 billion represents new spending that would not have occurred without enactment of the Medicare Modernization Act. The rest $337 billion is simply a replacement of current federal spending.

For all of the Congressional rhetoric about the drug benefit being delivered by private-sector entities, the iron law of government control will be enforced sooner or later: with increased government spending, one gets increased government control. For the champions of market-based reform, this massive shift in spending, enacted by a Republican Congress, is a huge policy defeat.

Congressional designs will invite further problems. Under the new Part D, Medicare enrollees will get a government standardized prescription drug benefit. In 2006, after paying an estimated $35 per month premium (estimated to represent 25% of the cost of the benefit) plus a $250 deductible, the government will pay 75% of drug costs between $250 and an initial coverage limit of $2,250. Between $2,250 and $5,100, Medicare beneficiaries will pay 100% of their drug costs the infamous "doughnut hole." Above the catastrophic limit of $5,100, beneficiaries will be required to pay 5% while the taxpayers pay 95%. The premium, deductible, and catastrophic limit will increase over time, reflecting changing costs. For example, by 2013, CBO estimates that the deductible will be $445, the initial benefit limit will be $4,000, and the out-of-pocket threshold will go up to $6,400. The new law provides, however, for generous subsidies to low-income beneficiaries.

The Congressional Budget Office (CBO) expects that 87% of Medicare beneficiaries will enroll in the program through new Prescription Drug Plans (PDPs), the new Medicare Advantage Plans, or through retiree plans that are qualified to offer the coverage under the new law.

The "doughnut hole" will be a new experience for Medicare beneficiaries. There has never been anything like it marketed to normal human beings in the private sector; so the Congressional drug benefit has no track record that the Medicare bureaucracy can look to in the process of making this thing work. We do know, however, that the Medicare bureaucracy will have to track the out-of-pocket costs of every beneficiary to determine when the total out-of-pocket maximum of $3,600 is reached. This will be an enormous task.

All good critics of the Medicare bureaucracy should take note: if this does not proceed smoothly, you cannot blame the team at the Centers for Medicare and Medicaid Services (CMS). Congress designed this thing, and Congress deserves a copy of every complaint sent to the CMS over the next few months.

How would the drug benefit impact beneficiaries? Different analyses show that the impact will be mixed. Recall, again that most Medicare beneficiaries, roughly three out of four, today have some form of drug coverage, either through private employers, Medigap or private supplemental insurance plans, or other government programs such as Medicaid. CBO estimates that in 2006, the average per capita drug spending among Medicare enrollees will be about $3,155, while more than half will have drug spending of less than $2,000 and about 20% will have spending of more than $5,000.

Again, with a combination of new subsidies and coverage, Medicare enrollees will do better on average than they would be doing in the absence of the drug benefit in 2006. Specifically, according to the PwC analysis, in 2006 the new Medicare drug benefit would reduce the average annual out-of-pocket per- capita drug expenses from $1,325 to $890.

Low-income Medicare enrollees will be big winners. Medicare enrollees getting government subsidies for drug benefit are expected to spend out of pocket 83% less on drugs than they would have absent the enactment of the new Medicare law, according to a recent study by the Kaiser Family Foundation.

Medicare enrollees with employer-sponsored drug coverage will be losers. About 11.8 million beneficiaries have such coverage, and according to PwC analysis, the amount of drug costs paid by insurance will drop from 71% to 67%. Employers will have the option of keeping their employee coverage and getting an extra federal subsidy on spending that is actuarially equivalent to the government benefit; they could supplement the Medicare drug benefit; or they could drop it altogether. According to the PwC analysts, the enactment of the drug entitlement is an additional reason for many employers to drop their coverage: "The retirement of the baby boom generation will put significant stress on retiree health plans, which will cause general coverage to drop over the long term." CBO expects that roughly 23% of retirees with company coverage will be moved into the government drug program in 2006.

Another Look at Health Spending

You keep hearing that we are spending too much on medical care; and maybe we are. But what you don't hear often enough is what we are getting in return for our money. A report on the subject, The Value of Investment in Health Care, released by MedTap International, examines health spending from 1980-2000 and concludes that over that 20-year period, for every dollar spent there have been health gains valued at between $2.40 to $3.00. Over that time period, annual death rates declined 16%; overall life expectancy increased by 4%; disability among seniors declined by 25%; hospitalization days declined by 56%; and mortality from heart attacks was cut in half.

Imagine the productivity gains that could result from the application of free-market reforms to the creaky health care financing arrangements!

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