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

Volume 61, No. 10 October 2005


There are two ways to obtain medical care: (1) use your own resources to buy it or (2) get someone else to buy it for you. There is prepayment through insurance or postpayment through credit. There is direct payment or "assigned" payment through an insurer. One can request charity, or use force, the latter most often through government, the largest third party.

Though it may be dismissed as irrelevant, the method of payment is critical. It affects almost everything else in some way: the patient-physician relationship, the type and quality of service, the availability and promptness of service, the conditions for delivery of service, the documentation, the morale of medical professionals and the cost.

Almost all the complexities that have ensnarled medical offices during the past 50 years and distracted physicians from attending patients and expanding their medical knowledge are the consequence of third-party payment. Without the third party there is no need for coding, claims forms, authorizations, eligibility checks, documentation of medical necessity, postpayment audits, payment delays for "re-pricing," compliance plans, consultants, or "smart cards."

Actuary Gerry Smedinghoff notes that Home Depot does not need a smart card to track your home repair purchases, including those from Ace Hardware. Home Depot and Ace Hardware have different SKU numbers for the same set of socket wrenches: no problem. Jiffy Lube can keep track of all the information needed about the customer and the car, whether payment is by cash, credit, or check. No one expects smart cards to revolutionize the hardware or car service industry. How could they transform medicine?

"We need `dumb cards,' not `smart cards,'" writes Mr. Smedinghoff. "Luckily, MasterCard, Visa, and American Express have already perfected them."

Patients have simple tools available for tracking their purchases: their check register, credit card statements, or a shoebox for storing receipts.

Dr. Robert Berry of Tennessee estimates that he saves $200,000 annually as a result of opting out of Medicare and forgoing all third-party payments. "If all primary care physicians went insurance free, the country would save approximately $60 billion in physician overhead alone."

In the days of direct payment, a bill for a 4-day maternity and 4-day nursery stay, including $10 for the delivery room, was $52.20 in 1950 at Memorial General Hospital in Las Cruces, NM. The statement was handwritten on a half-sheet of paper. The hospital bill for an uncomplicated appendectomy at St. Mary's Hospital in Tucson, AZ, was $150 in 1960, about 10 days' wages for a common construction laborer.

Last year, Virginia Mason Medical Center billed a patient $1,133 for a 30-second office procedure on her toenail. This and other similar charges are now the subject of a class-action lawsuit that may involve tens of thousands of patients (Seattle Times 9/9/05). Self-paying patients are increasingly irate about the inflated prices they are billed, compared with what hospitals collect from Medicare and insurers.

Hospitals are fighting back. Sutter Health, one of the nation's wealthiest not-for-profit hospitals, has filed a counterclaim against uninsured patients, claiming breach of contract and seeking the difference between what patients had paid and the inflated list prices.

As third-party payment has become predominant, costs have not only soared but are routinely obfuscated. Aetna has become the first major insurer to publicly disclose the fees it negotiates with physicians (Wall St J 8/18/05). Private physicians, who set their own prices, can simply post them on an office bulletin board, doctor's web site, or cashdoctor.com.

Strife is, of course, to be expected in a system that is based on looting or on everybody having to pay for everybody else's medical care. As collectivized prepayment leads to overconsumption, expenditures mount. In response to price controls in government programs and mandates such as EMTALA, costs are shifted wherever possible. It is difficult to calculate the precise underpayment to hospitals because of offsets from disproportionate share payments and graduate medical education allowances. Patients have no idea of the amount of the hidden sickness tax.

Inflated retail prices help to scare people into paying too much for insurance. They could paradoxically reduce hospital collections; K.B. Forbes suggests that patients who are furious about being gouged are likely to pay nothing.

Routine thievery, with government setting the example as in the Medicare Ponzi scheme, corrupts public morality. This generation of Americans apparently deems it moral to enslave their innocent offspring to pay Medicare unfunded liabilities of some $70 trillion or to simply steal from their doctors.

Indoctrination in the concept of a "right to health care" tends to make people unwilling even to consider postpayment, say by incurring a debt of $10,000 to $20,000 to cover a deductible even though the interest on the debt might well be less than the excess premiums for lower-deductible insurance.

Some patients act as if they believe that medical goods can only be purchased with an insurance card, not with cash. Only one insured person in six sometimes uses doctors who don't "accept insurance" (Wall St J 8/30/05). And only one of 15 primary care physicians contacted in a survey by Dr. Berry was willing to accept his nurse posing as an uninsured patient.

Honesty is an essential part of good medicine. And honest pricing is indispensable for restoring both trust and accurate economic calculations in the medical marketplace. Medical bills must be paid. Direct payment will come back because it is the most economical and most ethical method.


Community health center. Nebulously defined group of providers who rely on government grants to give people with no other choice the care that elites think they should have. Requires patients to miss work; sit around in clinic all day; endure lectures on weight control, smoking habits, and proper child care.

Dismal science. Term for economics coined by an opponent of the abolition of slavery, in response to the writings of classical economist John Stuart Mills. The most fundamental right of private property is the right to own yourself and your labor.

Market. Willing buyers and willing sellers engaged in voluntary transactions to their mutual advantage.

Non-profit. Tax-exempt; no external monitor on performance such as stock prices.

Shared responsibility. Giving up control.

Unaffordable health care. Diverts my personal resources from something I'd rather have.

[Thanks to Linda Gorman; Milt Kamsler, M.D.; and Sean Parnell.]


Admissions on "Universal Coverage"

"The government must become more involved in influencing how the money is spent" (Kronick R. N Engl J Med 2005;352:1252-11254).

"Americans must understand that they are going to make real sacrifices for other Americans. Currently, the anguish caused by annual increases in health care costs is offset by the knowledge that because of each year's medical progress, we are `buying a better product,' potentially for ourselves, should we become ill. A one-time increase of 50 percent in the rate of rising health care costs that benefits someone else is a harder sell" (Mongan JJ, Lee TH. N Engl J Med 2005;352:1260-1263).


Americans Most Insulated from Costs

In the United States, more than 85% of medical expenses are paid by insurers or governments. This is one of the highest rates of insulation in the world, according to OECD data. Even in Canada, the percentage of out-of-pocket expenses is slightly higher (Kling A, Tech Central Station 8/26/05).


CMS Has Massive Data Base

According to a recent Request for Information, CMS has one of the largest stores of health data in the country, with robust claims histories for all Medicare beneficiaries. It will be collecting 100% of claims paid for drugs under Medicare Part D. Citizens who want to maintain privacy need to consider taking responsibility for paying their own medical bills. Perhaps citizens should "receive cash directly from insurers...and pay their own bills (rather than having payments sent to providers)" (Health Freedom Watch, Aug 2005).


EMRs and Katrina

What did doctors need in New Orleans? "A portable electronic health record for all citizens would help" (wsj.com 9/13/05). No power, no computers, no water, no police protection, no telephone.... Which would be more useful: EMRs or battery-powered, line-of-sight ham radios?


Medical Tourism

The UK-based Medical Tourist Company arranges trips to India, Thailand, Germany, and other countries to obtain "world- class medical treatment at affordable prices." Services include hip/knee replacement, heart care, eye care, dental treatment, executive health checkup, cosmetic surgery, and second opinions ( themedicaltouristcompany.com). On-line price quotations are available. Travel, accommodations, and visas can be arranged.


Private Neurology Comes to Western New York

Lawrence Huntoon, M.D., Ph.D., F.A.A.N., AAPS Past President and Editor-in-Chief, has recently opened an office in Derby, NY, "to practice the innovative concept of private neurology" (The Sun 9/8/05). "The concept allows patients to make an appointment with the doctor and be reviewed minus the interference of a third party."

No "permission slips" are needed.

Dr. Huntoon has opted out of Medicare and does not contract with Medicaid or any third parties. Confidentiality is assured, as Dr. Huntoon is a noncovered entity under HIPAA. Initial visits cost $100; follow-ups $40.


The Role of Government

Government, for British political philosopher Michael Oakeshott, should be an umpire, not a player. If an umpire makes rulings that will ensure the outcome he thinks preferable, the game itself will be corrupted.

"The conjunction of ruling and dreaming generates tyranny."

Oakeshott drew a basic distinction between an enterprise association and a civil association. The former occurs when people unite in pursuit of certain shared objectives making profits, curing disease, saving souls. The latter is the sharing of certain rules among people pursuing different, even clashing purposes. People who sell rival products may agree on the laws of the market, at least the negative ones against stealing and cheating. Government is a neutral party, maintaining the rules, aloof from the purposes of all the competitors.

Oakeshott distinguished between rules and commands. A rule is impersonal, general, usually negative: "Thou shalt not." A command expresses someone's personal will and usually requires a positive action. Good laws are rules, not commands.

Oakeshott warned against the modern tendency to view government as a "vast reservoir of power" that could be turned into an instrument of the passions it should properly check (Sobran J, The Reactionary Utopian 9/6/05).


AAPS Calendar

Oct 22, 2005. SEPP meeting in Pittsburgh, www.sepp.net.
Sept 13-16, 2006. 63rd annual meeting, Phoenix, AZ.

Enforcement Efforts Intensify

PERM. According to a proposed rule released Aug 27, a new Payment Error Rate Measurement program (PERM) will give government one more reason to audit Medicaid providers. It is comparable to the Medicare CERT program (AAPS News, June 2005). CMS will also expand the Medicare-Medicaid Match Program, which checks to see that providers are not billing both for the same service (MCA 9/5/05).

Part D. HHS prosecutors expect the new program will be the focus of bad actors because of its size alone. The OIG will be watching for unlawful activities aimed at influencing which manufacturers' drugs are included in formularies. It will be monitoring for compliance with state pharmacy fee-splitting and referral rules. Novel prosecutorial theories based on the Travel Act and the Public Contract Anti-Kickback Act (PCAKA) will be applied (BNA's HCFR 7/20/05).

False Claims Act to Police Clinical Decision-Making. The FCA's draconian provisions for treble damages and exclusions cause most providers to settle rather than risk their provider status, as Central Montgomery Medical Center in Lansdale, PA, did despite the tenuous legal underpinnings of the U.S. Attorney's theory. His "creative" approach ties the FCA to the Medicare Conditions of Participation and corrective action plans, and thus to quality-of-care issues and medical necessity. CMMC is paying $200,000 because of alleged inappropriate use of physical restraints (MCA 8/8/05).

Vicarious Liability. If a HIPAA-covered entity lacks written policies or training programs, the government will assume that employees' actions are the policy, and the company can be held accountable for them (HIPAA Compliance Alert 6/13/03).

Medical Necessity. After prosecutors failed to prove that cardiologist Krishnaswami Sriram intended to commit Medicare fraud in billing for medically unnecessary catheterizations, the government may introduce a new tactic. If an insured patient receives a test that an uninsured one with the same diagnosis did not, the prosecutor may argue that the test was "not medically necessary but was done because the physician knew he or she would be paid for it" (MCA 5/16/05).


AAPS Files Amicus in Hurwitz Appeal

The government initially denied requests by both AAPS and the National Association of Criminal Defense Lawyers (NACDL) to file amicus briefs in Dr. William Hurwitz's appeal of his conviction for prescribing pain medications. After AAPS filed a motion with the court for leave to file an amicus, the government filed a response stating there had been a misunderstanding and it consented to the AAPS brief after all.

In the brief, posted in full at www.aapsonline.org, AAPS argued that the court committed at least three reversible errors. First, its jury instructions encouraged the jurors to define the contours of medical practice without assessing "good faith." Second, it excluded evidence of Dr. Hurwitz's compliance with state authorities, and evidence of conflicting federal positions on key issues. Finally, it allowed government expert testimony that was highly prejudicial and erroneous.

Key prosecution witness Michael Ashburn, M.D., at times gave the jury the impression that he was actively practicing in the field of pain management, which is not the truth. He has been profitably employed by a drug company that recently obtained FDA approval for a patch that delivers pain medication. The company's own press release states that Dr. Ashburn founded the company in 1997.

Past presidents of the American Pain Society wrote a letter expressing their dismay at "serious misrepresentations" in Dr. Ashburn's testimony.

"Disputes within the medical profession are not new, but it is unprecedented and unauthorized by Congress to imprison a physician based on it," writes AAPS General Counsel Andrew Schlafly. Under the standard adopted by the lower court, a young physician who proposed a novel procedure a tracheostomy to relieve General George Washington's airway obstruction could have been imprisoned had he been allowed to do the procedure and failed. Instead, the customary treatment of bloodletting was employed, and Washington died, probably of epiglottitis.


AAPS Amicus Supports Parental Notification

In a brief before the U.S. Supreme Court supporting the New Hampshire law requiring notification of parents before performing an abortion on a minor, AAPS joined with John M. Thorp, Jr., M.D., Distinguished Professor of Obstetrics and Gynecology at the University of North Carolina, Chapel Hill School of Medicine (Kelly Ayotte, Attorney General of New Hampshire v. Planned Parenthood of Northern New England, et al. No. 04-1144).

The brief brings to the court's attention the conclusions of a review article by Dr. Thorp that induced abortion is associated with an increased long-term risk of suicide and self-harm, placenta previa, preterm birth, and breast cancer owing to the loss of the protective effect of the first full-term pregnancy. Because of the importance of an accurate medical history before an abortion as well as preventive measures following abortion, AAPS argues that "upholding parental notice statutes serves to protect minors' health at least as much as striking down such statutes for alleged defects related to minors' health." The brief is posted at www.aapsonline.org.


A Crack in Hospital's HCQIA Immunity

In order for hospitals to be immune under the Health Care Quality Improvement Act, three standards for "reasonableness" in peer review must be met. But all the hospital has to do is to claim that the reviewers "believed" their actions to be "reasonable." Moreover, HCQIA "presumes" that a hospital has met all the procedural requirements for immunity, and failure to do so does not itself constitute a violation of HCQIA. Thus, hospital immunity is virtually absolute, and 80 cases that physicians have brought against HCQIA have failed.

The exception is the landmark case Clark v Columbia/ HCA 25P.3d 215 (Nev. 2001). Kenneth M. Clark, a child psychiatrist, had his staff privileges revoked because of alleged activities that were "disruptive" to hospital operations. The court found that Clark's dismissal was "unique": hospital records reflected that the reason was his "apparently good faith reporting of perceived hospital misconduct to the appropriate outside agencies, or whistleblowing."

The hospital bar is developing methods to circumvent this "whistleblower" defense, writes Lawrence Huntoon, M.D., Chairman of the AAPS committee on sham peer review.


New Weapon. "A faceless, nameless investigator, armed with weapons never used here before, is coming to Erie and Chautauqua counties to root out Medicaid fraud and abuse" (Buffalo News 9/8/05). As predicted, as funds in government programs fall woefully short of the generous promised benefits, government will increasingly look to physicians to make up the shortfall. Erie County has announced a probable 50% increase in property taxes, along with increased sales taxes, and county executives are salivating at the prospect of shaking physicians down for $100 million or so. Their pockets are "an area that is ripe for the picking."

A data-mining tool called VERIFY-NY is supposed to uncover the fraud, waste, and abuse that, according to one study, devour up to 40% of New York's Medicaid spending.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY


Medicaid Costs. The Colorado Tobacco Tax initiative approved in 2004 preferentially funds Community Health Centers. A 1990 federal law requires that Medicaid must pay 100% of costs now $130 for an office visit to Community Health Centers. Colorado Medicaid pays physicians $27 for a basic office visit. Urgent care clinics charge $100. We need a new slogan: "Save Medicaid money, go private!"
Linda Gorman, Independence Institute, Englewood, CO


Get the Government Out of Medicine. We can't force the market to do what it is not designed to do. Allowing politics to usurp our unalienable rights created our current problems. So how can we remedy the situation? We can supply medical care just as we did in America a century or so ago, before Europe exported socialism to America. No government programs. No entitlements. No forced wealth transfer. No majority opinion robbing productive citizens. No privileged class established by fiat. Just good ol' American compassion rising from the ashes of more than 100 years of government plunder, abuse, deception, and failure.
Joseph Lee Pugh, Diamondhead, MS


Hillary and HAL. Senator Clinton is not a movie buff. She is championing the idea of artificial computer intelligence in medicine by referring to HAL, the computer aboard the spaceship discovery in Arthur Clarke's 2001: A Space Odyssey. HAL caused havoc and death when he went berserk.
Frank Timmins, HealthBenefitsReform Group


Productive Use of Money. I estimate it would take about $50,000 to $75,000 to get started in a third-party-free clinic like mine which would be made up within a couple of years.

Imagine that all the money that has been invested in studying the problem had been given as low or no-interest loans to help start clinics. With $10 to $15 million, we could have had 200 direct-payment clinics actually caring for the uninsured, as opposed to talking about covering them. And the money would be coming back to be reinvested in more clinics.

It's about power, not caring. Agitate, agitate for ordinary Americans not people with powerful desk jobs to control the money. Expose the true motives of the "reformers." There is no policy panacea or great macrosolution that will usher in a medical utopia only a bunch of microsolutions, of which every direct-payment clinic is an example.
Robert S. Berry, M.D., Greeneville, TN


Responsibility. In an article entitled "What Gulag?" about how the Soviet regime has never been declared criminal, David Satter writes: "Russians...frequently lack the conviction, intrinsic to free men, that an individual answers for his actions no matter what the external conditions" (Wall St J 5/6/05). That is also true of most physicians. When one points out the immorality of managed care, for example, they may agree, but they usually say, "That's how it is; we have to adjust."
Robert P. Gervais, M.D., Mesa, AZ


Complexity. The enormous load of paperwork imposed on physicians in the name of controlling fraud collects thousands of bits of obligatory information that hide the real medical issues. The scheme is designed by third-party payers to avoid paying for anything other than a superficial evaluation.

In a third-party-payer (socialist) system, free-market forces do not control expenditures. The only method of control is to make services unavailable. The system is analogous to asking an airline pilot whether he can fly without a radio or radar. He is proud that he can fly "by the seat of his pants." So the manager tells him that to turn on the radar he has to fill out 18 forms and obtain a special permit.
James Durand, M.D., Arlington, TX


Health Systems Research. Advocates of socialized medicine gin up one "study" after another to "prove" that government medicine is the answer to all. One can expend energy reviewing the data and debunking the study, but they'll just come up with another one. It's like throwing mud at the wall to see what sticks. Nobody believed the study in To Err Is Human, but it is constantly cited anyway. It stuck.

To me, it's simple. When Americans go to Canada or the UK or continental Europe for their medical care, just as Canadians and Europeans come here, I'll believe that their system is better.
Russell W. Faria, D.O., Newport, OR

Legislative Alert

Katrina Blows Away the Congressional Agenda

Returning from the Labor Day recess, Congress will quickly re-set its priorities to deal with the fallout from Katrina, which is emerging as America's worst national disaster, surpassing the 1906 San Francisco earthquake and the Galveston hurricane disaster. With the displacement of millions, and the death toll reaching up into the thousands in the Gulf States of the Deep South, the effort to rebuild is well underway. Within just a few days, American private charitable donations exceeded $400 million, and Congress enacted a $10.5 billion emergency supplemental spending bill.

While the nomination of John Roberts to be the next Chief Justice of the U.S. Supreme Court is locked solid on the Senate calendar, expect other major items to be thrown off track. It appears that the appropriations process, and possibly Social Security and Medicaid reform, will be sidelined. The President's tax commission is supposed to report out a series of crucial recommendations at the end of September. Already, a major tax reform item appears stalled. The Death Tax relief that passed the House and was poised for a Senate vote has been withdrawn from immediate consideration.

With the damage to the Gulf refineries and the soaring price of gasoline, Congress is now focused on continued disaster relief efforts. The action will center on further funding for assistance to the displaced and the dispossessed, new energy initiatives, and new types of assistance for damaged industries such as shipping. New Orleans, the hub of such an enormous circle of economic activity, is likely to be the site of the most massive reconstruction effort since the Marshall Plan. The danger is that members of Congress will resort to the same old pork-barrel spending, using the Katrina disaster as a cover just as so many shamelessly did using the 911 attack.

The large numbers of displaced workers provide Congress an opportunity to do the right thing in health policy. Beyond the immediate needs, there is the fact that one can't depend on employer-based medical insurance when the employer's business has literally been swept away. Federal tax and regulatory policy should be changed immediately. The now meaningless legal relationship between employment and access to medical insurance brought about by the ball and chain of federal tax policy must be broken.

This could be done in two steps: (1) Direct subsidies or refundable tax credits for displaced workers, administered through state unemployment or disaster relief offices and (2) changes in federal law to permit purchase of coverage across state boundary lines and through various institutions. Catholic Charities and the Southern Baptist Convention, for example, are undertaking enormous relief efforts in the Gulf States. There is no reason why they should not be able to sponsor medical insurance plans.

Expect the Left to call for a major expansion of public programs, particularly Medicaid. Congress instead could do something different, and do it right away.

Unlike 911, the Katrina disaster is being accompanied by bitter partisanship. While one would expect that the political objective would be national unity, partisan divisions are surfacing and a "blame game" is well underway. An inflammatory process of investigation is probably unavoidable. While President Bush's approval rating has plummeted to 40%, Congress is faring even worse. According to a Gallup Poll, Congressional approval stands at 36%, with 58% registering disapproval.

The Status Quo Equals More Government

The Census Bureau's annual figures on uninsurance are not surprising. The Bureau estimated that 45.8 million Americans were uninsured in 2004, or 15.7% of the population. Because of population growth, the 800,000 increase in the raw number of the uninsured compared with 2003 was largely offset by an increase in coverage for 2 million more persons. The percentage of workers covered by job-based medical insurance continued to drop, from 60.4 to 59.8%.

The indisputable truths about the uninsured are unchanged. They are not a permanent class; most are uninsured for brief spells. While the uninsured are most heavily concentrated among low-income working people in small firms, significant numbers have a mid-level or even a high income. About one-fourth of those offered job-based coverage simply refuse to participate. Some are young and think they are immortal. Some of those who are perfectly capable of buying an affordable insurance plan refuse to do so, knowing that if they get really sick, the taxpayers will pay for their care anyway. And finally, we know that millions of families who have employer-based coverage are afraid of losing it because they fear being unable to afford an individual policy. Most indeed probably could not, depending upon their income, their tax status, and their state's insurance rules.

The continuing decline in private, employment-based coverage is a significant development. Historically, there has been a direct correlation between economic growth and employment-based medical insurance. In recent years, however, the economy has seriously improved, growing at 4% in 2004. Moreover, productivity growth since Bush took office has been the fastest since World War II. Europe and Japan, in sharp contrast, are not growing, and the retirement savings of a growing cohort of Europeans seniors are being invested in the United States. Despite oil prices exceeding $60 per barrel in July, U.S. unemployment was only 5% tantamount to full employment, reflecting the fact that a large number of folks are between jobs.

So what's going on here? The third-party payment structure is itself the culprit. The strain on employers is only apparent; the costs are always passed on to employees. They see that their wages are flat or increase minimally, even if their compensation has increased significantly mostly in the form of medical benefits.

The most significant news of the Census Report is that Medicaid grew by another 1.9 million in 2004. Government dependency is expanding, and private coverage is contracting, and neither the federal nor state policymakers seem ready to do anything to reverse the trend.

The Leftists in Congress and elsewhere can privately celebrate the "failure" of the private sector, and loudly applaud the expansion of the public sector, although they don't dare do so in public. They are winning all around. The rough 50/50 division of the medical dollar between private and public spending is coming to an end. Unless Congress and the Administration get serious about changing the current dynamics, we will see an acceleration of the current trend toward government domination of the financing and delivery of medical services for an ever larger number of Americans.

Health Savings Accounts (HSAs) and Insurance

Premiums for employment-based group medical insurance have been rising since 1996. In 2004, the average increase was 11.2%, slightly less than the 13.9% increase in 2003, but still significantly outpacing the growth in wages, productivity, and the general economy. And if workers try to escape and purchase insurance in the individual market, they will be penalized directly by the current tax code.

The individual market is a small portion of the general market, for tax and regulatory reasons, but it is healthier than generally imagined. The latest data on HSAs show that they are much more affordable than most people realize. For example, data released by ehealthinsurance.com, a large internet broker, show that HSAs are cheaper than all other forms of medical insurance and that their premiums are going down, while other premiums are going up. Average premium costs for an individual plan dropped 19% in the first 6 months of 2005 compared to all of 2004, from $137.94 to $111.57 per month. The biggest price drop was found in the 45-64 age group, with average monthly premiums going from $225.05 in 2004 to $187.07 in the first six months of 2005, for an average annual savings of $455.76.

Meanwhile, America's Health Insurance Plans (AHIP), the premiere medical insurers' trade organization, has just released a comprehensive study of the coverage of 3.2 million persons, the biggest study of the individual insurance market ever undertaken. According to the AHIP study, for the year 2004, the average annual premiums amounted to $2,268 for individuals and $4,424 for the family plan. Obviously, younger enrollees have less expensive coverage. For those between the ages of 18 to 24, the premiums averaged $1,170. For persons aged 60 to 64, the premiums averaged $4,185. For families covering children under 18, the annual premiums were $1,832, and for families headed by a person between the ages of 60 and 64, the annual premium was $7,248.

Differences in premiums reflected the differences in state and local markets, such as demographics and prevailing practice patterns, and the presence or absence of certain insurance rules, including community rating or guaranteed issue, which tend to make health insurance coverage very expensive. Nationally, single policies average $3,000 annually. About 98% of family policies were sold in states where the average premium is $6,000 annually. But in New Mexico, a family can get a insurance policy for an average annual premium of $2,985, while in New Jersey, the average family premium was a stunning $14,403. New Jersey, incidentally, like Maryland and New York, is one of the most highly regulated states in the union.

Based on the AHIP data, 88% of persons applying for individual insurance were offered coverage; 43% of single policies were purchased by persons between the ages of 25 and 44; 32% were held by people 24 years of age and younger; 25% were bought by people aged 45-64. Subscribers chose a variety of plans and benefits, including indemnity plans, HMOs, PPOs, and HSAs. More than 90% of plans had some form of coordinated care or case management. Most people buying this type of coverage bought plans with out-of-pocket expenses less than $4,000 annually. All plans had catastrophic protection, or a lifetime maximum benefit. The average was $5 million, with most consumers picking plans with $2 million or more.

Medicare and Medicaid Again

The White House is worried about how senior citizens will perceive the new drug benefit, and wants to do everything possible to get senior citizens to sign up for the benefit, which will take effect on January 1, 2006. The fear is that seniors will not like what they finally see, when they look at it up close and personal. And there is good reason for that. Needless to say, the Congressional Democrats are saying the drug benefit is not fat enough: they want to spend more, and close the "doughnut hole."

The Bush Administration has found a bright spot, that the drug premiums are going to be less than they projected, suggesting that competition is cutting the projected costs. Also, the level of competition and plan offering exceeds the expectations of even the Administration's friends in Congress and elsewhere.

The problem remains, however: Congress, with the active support of the Bush Administration, created a defined benefit as an open-ended entitlement, which will stimulate endless demand. That demand will never be curbed; only supply. And that means price controls. And price controls mean poor quality care. Not sometimes. Always.

The Medicaid Commission has come up with recommendations totaling roughly $10 billion in cuts over the next 5 years. While this is, in fact, a small set of reductions, they will be bitterly opposed by the Congressional Left.

The Commission is looking into longer-term reforms. Here is a suggestion: Focus on structural changes first and worry about budget cuts later. Change the current federal state match formula, and set up a defined contribution to the states. The state applies for federal money, but the state only receives the money on the basis of a negotiated agreement between state and federal officials. The state expands choice and access for beneficiaries, improves quality and efficiency in the delivery of care, and mainstreams more of its citizens out of Medicaid into the private medical system. If it meets these negotiated standards, the state gets a Medicaid bonus, a kind of "pay for performance" system.

That is precisely the kind of model that Congress created in the 1996 welfare reform act. It worked.

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