AAPS News – Apr 2003

Volume 59, No. 4 April 2003

“COVERING” THE UNINSURED: THE WRONG GOAL

Cover the Uninsured Week, another project of the Robert Wood
Johnson Foundation (RWJF) and its national partners prominently
including the AMA frames the debate in terms of how to
cover all the uninsured. This begs the real question of
whether we should aim for “universal coverage.”

Properly understood, that question means: Should we complete
the destruction of insurance a voluntary mechanism for
sharing risks through actuarially fair premiums and of a free
market in medicine, and turn premiums into taxes?

RWJF claims that 75 million Americans, or nearly one in
three nonelderly, were uninsured for at least part of 2001-2002,
based on a report by the left-leaning advocacy group Families
USA. Its president Ron Pollack, an advocate for “single payer,”
hopes that this will move the country toward “a tipping point
that will require real and meaningful political action.”

Coverage can be universal only if it is compulsory. And
since one of the main reasons people are uninsured is inability
to afford the premiums, the leftist answer is to force someone
else to subsidize the payment. Senator Breaux’s “universal
solution” (Wall St J 1/23/03), viewed favorably by RWJF
et al., would make all Americans “accountable” for buying a
government-approved “basic insurance package.” The government
would dictate “guaranteed access to group health insurance” and
subsidize premiums for “low and middle-income” Americans through
refundable, advanceable tax credits.

Left undefined is the tipping point for becoming “rich”
enough to pay for other people’s coverage. Breaux’s plan would
accelerate the increasing progressivity of federal taxes. Since
1983, the share of taxes paid by the highest 20% of wage earners
has increased by 16%, and the share paid by the lowest 20% has
decreased by 35%.

Universal coverage is supposed to benefit all because, it is
argued, “we” are already paying for the care of the uninsured.
One mechanism is the unfunded mandate called EMTALA, a burden on
physicians, hospitals, and the insurers and self-paying patients
to whom costs are shifted (as by a tenfold mark-up on diagnostic
testing and supplies in a hospital ER as compared with a
convenience clinic). It is assumed, without a shred of actual
evidence, that once people have coverage, they will receive their
“free” care and more of it in a setting other than emergency
rooms and at a net saving in cost.

Repealing unfunded mandates is not an initiative of RWJF,
AMA, et al. However, Senators Feinstein, Kyl, McCain, Domenici,
and Bingaman have introduced a bill to force taxpayers in places
like Minnesota to help pay for the care of undocumented aliens in
border states (such as those the Border Patrol brings to the
hospital without arresting, to keep the federal government from
having to pay the bill).

Any solution to rising costs or any remedy that does not
lead incrementally to total government takeover with expenditures
controlled only by rationing requires recognition of economic
factors studiously ignored by RWJF et al.

Government interventions designed to “stabilize” the
“fractionalized” small-group market explicitly not to
decrease costs or increase enrollment have helped to bring about
“consolidation.” The number of insurers has declined from 2,343
in 1988 to 1,470 in 1999, a loss of about one-third of the
industry in little more than a decade.

“A suspicious person might get the impression that the
Socialist faction is quite happy to allow its `contract hit men’
(a.k.a. trial lawyers) to attack the insurance industry and other
private enterprises with impunity, thereby causing intolerable
price increases and carrier defections, leaving the government as
the cavalry coming to the rescue,” writes Frank Timmins on
[email protected].

Since HIPAA became law, adverse selection has been the state
of small-group (2 to 50 members) medical insurance, writes
Timothy Pitcher of MGA Financial Services. Insurance, being
predicated on probabilities and risk avoidance, is not
the proper funding mechanism for an effective medical system.

The current structure, in fact, threatens the existence of
cash-based, market-set pricing. Two systems of payment coexist
and are destroying each other, writes George Fisher, M.D. Blue
Cross/Medicare pay by an accounting algorithm “insurance funny
money” while their competitors pay outrageous overcharges in real
money. By Gresham’s Law, under the current rules of the game,
“the proxy currency of insurance vouchers will always drive out
the dollar-based insurance,” leading inevitably to the stage of
not knowing what anything costs and being thus unable to choose
between alternatives. “When you don’t know where you stand in an
environment where prices are relentlessly driven upward by moral
hazard, you get into the fourth stage…: destruction of the
medical system by blinded and enraged payer-giants, thrashing
around and bellowing like wounded animals,” warns Dr. Fisher.

Ultimately, the choice will be between restoring honest cash
accounting and a true competitive model, or a politically driven
redistributionist model implemented with governmental force. The
first, based on each individual offering or purchasing services
at the going price, results in the only allocation of services
that makes all participants in the market better off
(Arrow KJ, Amer Econ Rev 1963;LIII(1):941-973).

Instead of forcing everyone into a flawed, dishonest program
of faux insurance as a condition for medical service, inevitably
sacrificing some to the supposed good of the whole, medicine
needs to be separated from insurance.

Real doctors don’t rant about “covering” the
uninsured; doctors serve sick patients. Physicians
cannot serve patients well if they are beholden to government or
another third party that survives or profits by denying payment.

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Tipping the Balance

The paltry 1.6% increase in Medicare fees passed but it was
“only because doctors rebelled,… evaluated the
benefits of leaving, and concluded that out is better than
in…that the government backed down,” said Tom LaGrelius,
M.D. “Everybody in, nobody out” would end physicians’ bargaining
power.

Under the regulators’ radar, a shift in physicians’
practices is already occurring. If a critical mass is reached,
the dynamics of the system could rapidly shift to the free-market
side. Greg Scandlen of the Galen Institute includes in this
development physicians who drop out of Medicare and managed care,
organizations like SimpleCare, and “boutique” medicine.

Vern Cherewatenko, M.D., reports that more than 1,500
medical professionals and 15,000 patients are engaging in PIFATOS
(payment in full at time of service) through SimpleCare. The time
is now, he writes, to return medicine to patients and doctors by
charging fair prices, getting paid directly, and teaching
patients to secure an affordable major medical policy to cover
catastrophic expenses.

“I never tell my patients to find another doctor or that I
will not care for them. The insurance companies are much better
at telling them to find another doctor! I just choose not to take
their insurance…or the game book that their insurance
company `forces’ me to play by if I sign up.”

The motto for the Patmos Clinic in Greeneville, TN, founded
by Robert Berry, M.D., is “Serving the uninsured. Leading
consumer-driven healthcare.” There is a tremendous entitlement
mentality to overcome, and some patients go elsewhere rather than
pay $15 more than their copayment. The usual reason for inability
to pay is misplaced priorities, such as a smoking habit. Dr.
Berry distributes information on medical savings accounts, and 15
patients have opened one.

For many physicians, he writes, “I don’t think the water has
gotten hot enough for them to jump out of the system yet. HIPAA
compliance may change that.”

In a market that is “massively Medicare and managed care,”
Dr. LaGrelius reports seeing many “HMO and PPO refugees paying
cash for care.” With 30% uninsured, and one in three of those
well-off by any standard, there are more than enough cash-paying
patients to support private physicians. Members of the INDOC
organization he founded are “busy and happy; everybody else is
busy and miserable.”

Patients are wising up also. Rick Malwitz writes that his
insurer wouldn’t pay for a consultation without a written
referral from a primary-care physician. He couldn’t get the
referral without delaying his appointment for six months.

“Dumb me. The need for a referral is specifically required
according to Page 23, Section A-7e, Paragraph ZZTOP of the
health-insurance policy for which my wife’s employer pays a cost
equal to the price of a Lexus” (Home News Tribune
1/23/03). So he had to pay the specialist $96.

“I would gladly pay $96 to have a broken water pipe
repaired. When I take my car to my mechanic and the bill is only
$96, I get home and gush, `It was only $96, honey’.”

Mr. Malwitz decided it was money well spent. He explains
that his generation has been conditioned to think that medical
costs are supposed to be paid with other people’s money. But it
is apparently not too late to learn.

Americans may reject the “hub-and-spokes” concept of
insurance-financed, institution-centered medicine promoted since
1923. As George Fisher, M.D., notes: “We discovered in the Korean
War that we could practice perfectly well in tents.”

Dr. Huntoon to Edit J P&S

Our peer-reviewed journal, formerly the Medical
Sentinel, enters its eighth year of publication with a new
name the Journal of American Physicians and Surgeons and
a new editor. Our founding editor, Miguel A. Faria, Jr., M.D.,
has stepped down after seven years of loyal service. Lawrence R.
Huntoon, M.D., Ph.D., a past president and a frequent contributor
of scholarly articles, essays, and pamphlets to AAPS publications
as well as other journals, is our new editor-in-chief. The
journal web site will be www.jpands.org.

AAPS Opposes “Security” Bill

Joining with a broad coalition ranging across the political
spectrum, AAPS is urging Congress to oppose the Domestic Security
Enhancement Act (DSEA) and to fight terrorism without severely
diluting the Bill of Rights or destroying the system of
governmental checks and balances. As the coalition letter states,
“the draft bill contains a multitude of new and sweeping law
enforcement and intelligence gathering powers, many of which are
not related to terrorism.”

A prime concern is that any political dissent or activism
could be defined as “terrorism,” resulting in the erosion of an
American’s rights to the protection of the due process of law.

Why People Can’t Afford Insurance

In addition to government price-fixing and the resultant
cost-shifting, hospital payment policies manipulated by the
public-private partnership, and other government interventions
alluded to on p. 1, many patients are priced out of the market by
guaranteed issue and state mandates.

The monthly cost of insurance for a family in a guaranteed-
issue state ranges from $1,132 (New York, HMO) to $5,855 (New
Jersey, $500 deductible), compared with an average of $257 for a
$1,000 annual deductible in non-guaranteed-issue states (CAHI,
11/20/02). The difference between Indiana and New York is enough
to pay the $1,000 deductible almost eleven times.

State mandates that require a “basic insurance package” to
include items ranging from alcoholism treatment to speech and
hearing therapy are responsible for 25% of the uninsurance rate.
“The real scandal in American health insurance isn’t that some
people lack coverage for this or that treatment, but that tens of
millions of Americans risk financial ruin because of policies
that make basic insurance difficult or impossible to buy
(Wall St J 10/1/02).

AAPS Calendar

Sept. 17-20, 2003. 60th annual mtg, Point Clear, AL.

Oct. 13-16, 2004. 61st annual mtg, Portland, OR.

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HIPAA Countdown

Are You Covered?

As the April 14 enforcement date looms, AAPS is continuing
its aggressive mailing campaign to doctors throughout the nation
to inform them of the “country doctor escape route” established
in our pending litigation. Any physician, regardless of
location, can be a noncovered entity for all parts of
“administrative simplification” by refraining from certain
electronic transactions. The Privacy Rule, the transaction code
sets standards, and the Security Rule simply do not
apply to these physicians. We receive many telephone calls
from physicians who are incredulous, as they have been told that
“everybody” is covered. Here is the procedure, again, for
checking your status on the official government web site:

Go to www.cms.hhs.gov/hipaa .

Click on “HIPAA Administrative Simplification.”

Scroll down to “General Information.”

Click on “Covered Entity Decision Tools.”

Click on “Is a person, business, or entity a covered health
care provider?”

Follow the decision tree from there.

Many physicians ask about the use of a FAX machine.
This issue was addressed by CMS officials in the nationwide
Roundtable conference call on February 28, in which 1,939 persons
participated. (A transcript is to be posted eventually at
www.cms.hhs.gov/hipaa/hipaa2 .) The caller asked whether
he was “safe” if he used a paper-based FAX machine to send
information to someone who might, unbeknownst to him, use a
computer FAX modem to receive it. The answer was that if the
message originates on a piece of paper, the
sender does not become covered because of that message,
regardless of the manner in which it is received. However, if the
sender uses a computer to generate the FAX, the whole panoply of
administrative simplification rules is triggered.

“There is nothing easy about this stuff,” said Karen Trudel
(no matter what your would-be compliance vendor tells you).

A call dedicated to the Privacy Rule is scheduled for
March 26. To learn how to participate, follow the instructions
above, but look under “Upcoming Events.”

Advanced Implementation

AAPS Public Relations Counsel Kathryn Serkes reports from
the Feb. 28 Privacy and Data Security Summit sponsored by the
International Association of Privacy Officers:

A presentation by William Braithwaite, M.D., Ph.D.,
Director, PriceWaterhouseCoopers, generally known as “Dr. Hipaa,”
highlighted the complexities and contradictions in the Privacy
Rule.

The Privacy Rule requires two types of disclosures
(by covered entities): to HHS if it comes knocking, and to
patients. Any disclosures must be limited to what is permitted
under each of four categories, for which requirements vary: (1)
treatment, payment, and health care operations (TPO); (2) uses
and disclosures involving individual care or directory
assistance; (3) specific public policy exceptions; (4) all others
as authorized by individual patients.

All forms of communication, including oral, are covered.
There is a universal exception: it is always acceptable to
violate the patient’s privacy if failure to do so would interfere
with treatment. The physician may “share” information about a
patient suspected of abusing drugs, as long as he has explained
that policy in his privacy notification. Public policy exceptions
to privacy protection include law enforcement, public health,
health care oversight, organ transplants, research, and other
disclosures required by law.

Exceptions to the “minimum necessary” rule include
information needed for treatment, for standard transactions, for
enforcement, or for disclosures required by law.

Ms. Serkes asked: “In a conflict between the provider and
the payer, won’t the payer always win because it writes the
check?” The answer is yes, but there is probably no liability
because the payer has spelled out the rules in advance. Ms.
Serkes also asked how physicians could meet their ethical
responsibilities. Dr. Braithwaite responded that “HHS expected
tension between providers and payers and said that industry needs
to work it out amongst itself.”

The recourse for physicians is to complain to industry
groups or to the Office of Civil Rights even though OCR said it
will keep hands off and let industry work it out.

“But if they get enough complaints, then maybe they’ll write
guidelines or issue regs,” Dr. Braithwaite said.

Tip of the Month: AAPS General Counsel Andrew
Schlafly suggests items that a noncovered physician might include
in a letter to patients:

1. You can protect their privacy better by qualifying for
the “country doctor exception.” Covered entities must provide
sensitive information to third parties that claim to perform
oversight functions.

2. As a noncovered entity, you can better tailor your
practice to the needs of the patients rather than one-size-fits-
all government requirements. In some instances, complete privacy
is warranted; in other cases, the ability to share information
with other doctors is what helps patients most.

3. You can focus better on patient care if you are not
spending time and money on compliance with incomprehensible
regulatory requirements. Much of the increase in medical costs is
caused by such burdens.

Can’t Escape?

If you absolutely cannot qualify for the country doctor
exception, beware of overpriced, unscrupulous compliance vendors.
At least start with free government materials. Under “Educational
Materials” on the web site referenced above, click on “HIPAA
101,” which concerns transaction code sets. For the Privacy Rule,
go to
www.hhs.gov/ocr/hipaa/assist.html.

***

Covered or not, please return the enclosed survey card!

Protecting Privacy Is Not Enough

If you are covered, here are some of your tasks:

Train your entire workforce and document it.
Failure to do so may result in $250,000 in fines, lawsuits from
patients whose privacy is violated, bad press, and even jail
time.

Perform a “role call.” Define the job functions of
all staff members and determine which categories of Protected
Health Information they will be permitted to access.

Prepare notifications for patients. Except in
emergencies, every patient must receive one and sign an
acknowledgement sometime before or during the patient’s first
visit after April 14. If a patient refuses to sign, you must
document why. If you do a phone consultation, mail the
notification the same day. An executive summary might be needed
(AMNews 2/24/03).

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Correspondence

Where Have All the Doctors Gone? A patient reported
that he had seen his former primary physician working as a stock
boy at WalMart. “All those years of education…. What a waste!”
This physician had the best bedside manner he had ever known. “It
all happened so quickly and quietly….” The patient didn’t know
that an adverse peer review had cost the physician his hospital
privileges, and as a result, his license.

Physicians, being mere mortals, do make mistakes. What then?
Is a physician so uneducable that a mistake means the swift ruin
of a medical career, the destruction of a livelihood, years of
work and sacrifice summarily trashed?

Physicians must take a hard look at procedures that treat
all as guilty until proved innocent. Let him who is without error
cast the first stone. Patients also need to take heed, lest they
find that all the good doctors have gone, never to return.

Lawrence R. Huntoon, M.D., Ph.D., Jamestown, NY

Who Is the Doctor? For psychotropic drug use
“outside of guidelines” in skilled nursing facilities, Florida
Medicare Part B requires an evaluation by an “interdisciplinary
team.” Any such rule regarding the prescribing of medication may
be construed by some as an authoritarian encroachment on the
legitimate practice of medicine.

J. William Johnson, M.D., Cocoa, FL

Express Scripts writes to physicians that “obtaining a
medication history directly from your older patients may be
challenging.” The Multiple Medications Program uses pharmacy
claims to identify patients who take multiple medications. The
doctor may wish to insert the profile it generates into the
patient’s record, “to assist you in planning the best course of
therapy.” This claim rings hollow. Who is paying them to plan the
best course of therapy? They failed to reply to my message
stating some concerns about the patients’ privacy.

H.C. George, M.D., Fairhope, AL

Who Is Competent? In classical liberalism, those who do
the work, such as doctors, are presumed to be more competent than
bystanders, such as government. But in decertifying my
surgicenter, government presumed itself to be competent, and me,
incompetent, even though I had successfully done the work for 15
years. However bogus the cited “deficiencies,” I have no recourse
against the harm that was done to me.

Robert P. Gervais, M.D., Mesa, AZ

A Reason to Be Uninsured. In my experience, the freedom
to go uninsured for a period of time has been absolutely
essential to being able to do other things. I have started four
businesses in the past ten years. In every case, I would not have
been able to do that had I been required to pay for insurance at
all times.

Greg Scandlen, Frederick, MD

Why Is the Price So High? Why do hospitals mark up
their noninsured prices so egregiously that hardly anyone can
afford list prices? It must be clear to them that this is what
drives people to insurance schemes. I strongly suspect that the
Blues are behind this, either forcing the hospitals to do this or
colluding with them in some mutually beneficial arrangement that
requires it. As long as the markup is so severe, a cash
marketplace is impossible, and even a rich person is forced to
buy insurance to protect himself against gouging.

I have repeatedly asked honest hospital accountants why they
do this. They always reply: “We couldn’t survive if we didn’t.”
I’m sure that answer is accurate, but incomplete.

George Fisher, M.D., Philadelphia, PA

AMA Member #1? Those who think that the AMA might be
willing to help restore individual contracts between physician
and patient should consider that, according to the AMA’s 2001
financial report, it received almost $20,000,000 in active grants
from the Robert Wood Johnson Foundation. Among other things, it
administers the SmokeLess States program. AMA membership dues
totalled $54.4 million. No doubt some members are more equal than
others.

Linda Gorman, Englewood, CO

Expert Miscalculation. I heard that Managed Car failed
several years ago because the mechanics thought it was the
stupidest idea they had ever heard, and none of them signed up
for it.

As the founder of the largest IPA in Washington State, we
paid Milliman & Robertson hundreds of thousands of dollars for
their actuarial expertise. They had beautiful graphs showing how
much we would profit from managed care. I should have listened to
my mechanic!

Vern Cherewatenko, M.D., Renton, WA

A Casualty of Mandatory Insurance. After 20 years
practicing general surgery without a single lawsuit, Pennsylvania
suspended my license for 6 months for the sole reason that I
could not afford to pay the 68% CAT Fund emergency surcharge on
my basic liability premium, after I had already paid the 102%
surcharge that year. When after 6 months’ suspension, I still
couldn’t pay the surcharge, plus a $7,000 fine, I was forced to
retire.

When I subpoenaed the report on the investigation of the CAT
Fund, Gov. Ridge refused to release it, claiming absolute
executive privilege.

Louis A. Meier, M.D., Norristown, PA

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Legislative Alert

Medicare: Fumbling in the
Backfield

and Demagoguery in the Galleries

The President has an ambitious health policy agenda, and
nothing is more ambitious than his proposal for major Medicare
reform. Within minutes of the speech announcing this objective,
there were public relations problems. To restate the key facts:
Governor Gary Locke of Washington State and Senators Stabenow,
Kennedy, and Daschle all stated within 24 hours of the
President’s address that the President was going to force senior
citizens into HMOs in order to get prescription drug
coverage. Perhaps this was merely a giant misunderstanding on
their part, and they simultaneously arrived at this
misunderstanding by happenstance. But the point remains: There is
not and was not a shred of evidence to support that allegation.
On the contrary, the early draft of a Medicare document leaked to
The New York Times and others, plus the
accompanying public documents presented on January 28 by the
White House to Congress and the press, indicated that the
President was proposing seniors’ access to a variety of plans,
not excluding HMOs, but also including fee-for-
service and PPO plans like those in the federal employees’
program.

Yes, Congressional leftists distorted the President’s
Medicare agenda. But the White House gave its opponents an
opening by indicating, in the early drafts of its reform
proposal, that it would provide no prescription drug coverage to
seniors who remained in the traditional Medicare program, called
” fee-for-service,” which enrolls 85% of the 40 million Medicare
beneficiaries. Now the White House will also propose a drug
benefit for traditional Medicare beneficiaries, including a
prescription drug discount card and a catastrophic coverage
provision for high drug costs. According to Senator Edward M.
Kennedy (D-MA), “This is not a compromise. It’s a hoax. It still
forces seniors to abandon their family doctors to join HMOs to
get the drug benefit they deserve.” (NY Times 2/28/03).
Senator Kennedy, we beg to note, was a key backer of the 1973 HMO
Act, which, yes Virginia, promoted HMOs as national policy. Just
in case you forgot.

In the meantime, the damage had been done. The so-called
exclusive HMO option became leftist political gospel on Capitol
Hill so quickly that even the President’s Republican allies
seemed confused, and, instead of firing back with gusto, they
sounded apologetic and defensive. Senator George Allen (R-VA)
told reporters that, “I’d like people to be able to get a drug
benefit regardless of which plan they join. I don’t think folks
should have to join an HMO to get the benefit.” Senator Charles
Grassley (R-IA), Chairman of the Senate Finance Committee, said
that the leaks, the lack of clarity about the details, and the
lack of sufficient communication with the White House “botched”
the development of the Medicare proposal. And House Speaker
Dennis Hastert told the White House to back off any plans to
draft a detailed Medicare reform proposal, and leave that task to
the Congress (Congress Daily, 1/30/03). Capitol Hill
observers expect that the White House will replicate its approach
on education reform, draft a set of proposals outlining the
principles and objectives of reform, and let the Congress work
out the details.

In the meantime, the White House still has time to get off
the mat, recover its balance, and start taking the offensive. It
must redefine the terms of the national Medicare debate, make a
cogent case for change, and counter-attack vigorously any
Congressional attempts to distort its position.

Ending Government Monopoly

One of the key advantages of serious Medicare reform is
economic freedom. There is no real alternative to Medicare for
primary insurance coverage for anyone over the age of 65 because
there is now no viable private medical insurance market. It has
effectively been displaced by Medicare. While Medicare Part B is
“voluntary,” it is voluntary only in the sense that, for most
Americans, it is Medicare or nothing. Private insurance is merely
a supplemental thing for most Americans over the age of 65. And
seniors feel compelled to purchase that supplement because of
gaps in Medicare coverage.

Monopolies and monopoly price-fixing are the natural enemies
of consumers. Monopolies also block economic efficiencies that
would otherwise obtain with a free, open, and competitive market.
For some physicians, dealing with a multiplicity of insurance
companies may not appear, at first glance, to be an attractive
option. But it is indeed far more attractive, on second thought,
than being forced to deal with just one carrier, with the power
to impose reams of regulations, resulting in hours of paperwork
and fines for clerical errors. Medicare is, in fact, a giant HMO
that can put doctors in jail. Monopolies, even government
monopolies, are attractive to some doctors. But, most doctors
still seem to favor a system based on patient choice and
competition.

One of the benefits of a pluralistic system based on free-
market principles is that consumers, not employers or government
officials, drive and shape the system. An insurer with high
administrative costs must reflect that additional overhead in its
premiums, and the higher the premiums or the greater the
bureaucratic hassles imposed on doctors the less competitive its
products become. Non-competitive enterprises go under an outcome
that is, as Adam Smith would say, a very, very, very good thing.

The best way to attack third party administrative costs, of
course, is to bypass third party payments whenever and wherever
possible, and that is why a growing number of firms are resorting
to consumer-driven plans or favor the broader use of medical
savings accounts and similar arrangements.

The Myth of Medicare’s Administrative Efficiency

On Capitol Hill, opponents of Medicare reform are
normally the strongest defenders of the status quo, champions, in
effect, of the Medicare bureaucracy. They occasionally deny this,
but they routinely insist on the alleged economic efficiency of
Medicare, claiming that Medicare registers administrative costs
of between 1 and 2% on an annual basis. If administrative costs
are narrowly defined as the payment of the salaries and expenses
of 4,500 bureaucrats at CMS as a fraction of the rapidly rising
expenditures ($250 billion this year) for Medicare payouts, the
administrative costs are indeed that low. But this approach is
also highly misleading. What Medicare does very efficiently is to
shift to doctors, hospitals, and other medical professionals the
enormously high transactional costs of complying with Medicare
rules. Those very real administrative costs are never even
counted in the Medicare budget. Doctors absorb them or shift
them. As we have noted, no one, but no one, has done a serious
econometric analysis of what these costs really are. That
analysis is long overdue.

Is the FEHBP Really The Best Model for Reform?

Congressman Jim Nussle, Chairman of the House Budget
Committee, has told HHS Secretary Tommy Thompson that the
Committee would have to have the details of the Administration’s
Medicare reform proposal within weeks, because it must present a
budget for House floor consideration. Secretary Thompson recently
told the House and Senate Budget Committees that the
Administration’s Medicare reform proposal, as the President
indicated in his State of the Union speech, would indeed be
modeled on the Federal Employees Health Benefits Program
(FEHBP).What that means once again for the zillionth
time is that the senior population would not be forced into
HMOs, but would have a variety of options including fee-for-
service or PPO-type plans.

Members of Congress, almost all of whom are enrolled in the
program, can obviously disagree on the merits of the FEHBP. That,
one can argue, is, at least for Members of Congress, a relative
thing; it’s a matter of their personal experience and preference.
(Personally, this author was in the program for 11 years, and the
experience was excellent.)

Maybe Congress and the Bush Administration can and should do
something much better than build on the experience of the FEHBP.
Perhaps there is another working model of reform readily at hand.
Maybe Congress should start a national medical savings account
system for young workers, and create a reservoir of pre-funded
medical care for their retirement. Professor Tom Savings of Texas
A&M University, a member of the Medicare Board of Trustees, has
proposed something similar to that, and the idea has gotten a
respectful hearing, particularly among economists. Conservative
policy analysts are generally convinced that the only long-
term solution to the current entitlement problem is the pre-
funding of medical and other retirement benefits.

But because the President has put the FEHBP model on the
table, that is where the debate is today. So, let us debate the
merits of the FEHBP versus Medicare. On any fair reading, the
federal employees’ program is clearly superior to Medicare. In
Medicare, the insurance offering is rigid and outdated; it does
not, in fact, provide real insurance, but rather an “entitlement”
to price-controlled medical services, whose availability is
determined by the conditions set forth by the Congress, the
Medicare bureaucracy, and its contractors. “Cost control” in
Medicare means another reduction in reimbursement, which in turn,
is a reduction in the supply of services. That’s what price
controls do; that is, by the way, what they are supposed to do.
The results are not hard to figure out. Doctors are not taking
new Medicare patients, 2,500 home health agencies went under in
the name of the Balance Budget Act, and nursing homes cut back
their services to ailing seniors all in the name of Medicare
“cost control.” Seniors today routinely pay more half of all of
their medical costs out of pocket and have no protection from
catastrophic illness.

FEHBP also offers a range of choices, even to persons living
in rural areas. This is particularly important. Budget Committee
Chairman Jim Nussle said he would not support an expansion of
private Medicare options unless it would help rural areas. What
Members of Congress seem to forget is that in the FEHBP the
program that they are enrolled in, thank you very much every
federal worker in the country, urban or rural, can choose among
at least 12 national plans, mostly fee-for-service or PPO plans,
and they can drop plans that they don’t like. They can also
choose a variety of plan benefit offerings; there is no
standardized benefit requirement.

Congressional leftists routinely attack private medical
insurance as an inappropriate vehicle for covering the elderly,
even though, to tell the truth, most Americans say they are
overwhelmingly happy with private insurance plans. In other
words, Congressional leftists demonstrate an ideological
hostility to the private institutions that provide medical
coverage and satisfaction to an overwhelming majority of American
citizens. And, for some strange reason, Congressional
conservatives cannot seem to take advantage of this disconnect
between leftist rhetoric and the social and economic reality.

But once again, the President’s Medicare reform proposal is
not based on conventional private medical insurance, secured
through employers. The FEHBP is a government program not a
private program. And, on the basis of two key free-market
principles, consumer choice and competition, the FEHBP is
superior to private employment-based medical insurance. Moreover,
for retirees, it is far more stable. According to a recent
(December 2002) survey by the Kaiser Family Foundation and Hewitt
Associates of 435 large firms, the average retiree contribution
in private insurance for persons over the age of 65 rose 20%
between 2001 and 2002; 13% of employers say they terminated
medical insurance for future retirees over the past two years;
and 22% of firms say they are likely to terminate retiree
coverage for future retirees within the next three years. The
good news about the FEHBP is that it is voluntary. Nobody is
forced to enroll in it. But for senior citizens, there is no
alternative primary coverage outside the current Medicare
program.

Can Tax Credits Reduce Medical Costs?

Recently the Kaiser Family Foundation reported that the
government spent $31 billion to treat the uninsured in 2001.
Merrill Matthews of the Council for Affordable Health Insurance
asks a simple question: Why are Washington lawmakers wasting
taxpayers’ money? Medical tax credits would save the taxpayers a
huge amount of money. Matthews points, for example, to the “The
Fair Care” legislation, recently introduced by Congressmen Bill
Lipinski (D-IL) and Mark Kennedy (R-MN). The bill provides $15
billion worth of tax credits to the uninsured so they can
purchase private medical insurance. Matthews points out that most
of the uninsured are lower- and middle-income workers who cannot
afford to buy a policy, but tax credits would make medical
policies affordable for them, give them a choice of private
plans, and introduce new efficiencies into the medical insurance
market, while saving taxpayers roughly $15 billion in the
process. Not bad.

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