AAPS News – Aug 1990

Volume 46, No. 8 August 1990

A FREE-MARKET SOLUTION

In striking contrast to the Pepper Commission, the AMA, the
ACP, the AFL-CIO, Chrysler Corp., and many others, a Dallas think
tank has prescribed more of what works, instead of more of the
same (government intervention) as treatment for the health care
crisis. The Task Force Report of the National Center for Policy
Analysis (NCPA) addresses the problems of the uninsured, the
spiral in medical costs, the threat of rationing, and a tort
system that is out of control.

How the Medical Marketplace Differs

Whereas in most markets, the pursuit of individual self
interest tends to lower costs and solve problems, in the medical
marketplace it has the opposite effect. Normal market forces do
not operate, for a variety of reasons:

(1) Consumers are usually spending someone else’s money.
Less than 10 cents out of every dollar of hospital income and
only 28 cents out of each dollar of physicians’ fees is paid by
patients using their own funds.

(2) Available health insurance plans allow very few options
to meet individual budgets and needs.

(3) Little information about price and quality is available
to patients.

(4) As normal incentives are replaced by bureaucratic rule-
making, the success of physicians and hospitals depends less on
service to patients and more on meeting the requirements of
third-party reimbursement formulas.

The Role of Insurance

In many respects, medical insurance is not insurance at all,
but is prepayment for the consumption of medical care. “In a
very real sense, it is the insurance company, not the patient,
that is the customer of medical providers,” states the report.
The “principal role of the patient is to give consent to medical
procedures” that third parties buy and medical providers sell.
That is one reason why patients are given so little information
about cost or quality. (There is one remarkable exception. For
cosmetic surgery, patients are almost always quoted a fixed price
in advance, and generally have more information about quality
than for any other type of surgical procedure. Not coinciden-

tally, they ordinarily pay with their own money.)

Tax Subsidies for Wasteful Insurance

Federal tax law has an enormous impact on employer benefit
plans because the marginal tax rate is so high. Millions of
workers take home less than 50 cents of each additional dollar
earned. For a highly-paid employee, $1 worth of health benefits
is worth as much as $1.97 in additional wages. And since out-of-
pocket expenses must be paid with after-tax dollars, whereas
employers pay premiums with pre-tax dollars, the tax code
encourages first-dollar coverage, the most wasteful type of
insurance. For one thing, it usually costs an insurance company
about $50 to process a claim for a $50 physician’s fee, thus
doubling the cost of health care. Also, demand increases when
patients perceive that services are “free.”

The current tax code is inequitable, conferring the largest
benefits on the most highly paid workers. NCPA proposes that all
taxpayers should receive the same incentive to purchase health
insurance, regardless of whether the policies are paid for by
individuals or by employers.

To eliminate the subsidy for wasteful insurance, the tax
credit should be limited to an amount sufficient to purchase in-

surance with, say, a $1,000 deductible and a 20 percent copayment
up to an additional $1,000. In addition, the premium saving from
a policy with a higher deductible could be deposited in
individually owned Medisave accounts, providing self insurance
for small medical bills. The tax subsidy would then remain the
same, but individuals would be freed from paying for the wasteful
consumption of other policyholders and from the arbitrary
constraints of third parties.

Freedom of Choice

The key to restoring the medical marketplace, according
to the NCPA report, is to put the patient back into the
transaction, transferring authority from the political arena and
large institutions back to the hands of individuals. Patients
need more power to choose-not less.

Ironically, employee benefit law, which was designed to
encourage the purchase of health insurance, is actually
increasing the number of the uninsured. Individual problem-
solving solutions are “generally forbidden under federal
law,…[which] insists that all employees be offered the same
coverage on the same terms.” Employers, unable to afford the
required package of benefits that no single employee may actually
want, may cancel their group policies altogether.

The NCPA report also proposes giving freedom of choice to
the indigent, who are forbidden to pay more than the Medicaid-
approved amount to purchase care of higher quality. And all
patients are now denied the opportunity to circumvent the high
cost of tort law through voluntary agreements.

Members of the NCPA Health Care Task Force include economist
Walter Williams; law professor Peter Ferrara; Gerald Musgrave of
Economics America (who addressed AAPS in Orlando); and
cardiothoracic surgeon Robert Sade, MD, a former Director of
AAPS. NCPA President John Goodman, Ph.D., will be a featured
speaker at the 47th annual meeting in Scottsdale, and the report
will be available.

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From Capitol Hill

Medicare Claims Filing Requirement. At press time,
seven cosponsors have signed onto Rep. Joe Kolter’s bill to
repeal the requirement for physicians to file all Medicare
claims. They are: Representatives Derrick (D-SC), Hall (D-OH),
Jontz (D-IN), Towns (D-NY), Hughes (D-NJ), Emerson (R-MO), and
Lewis (R-FL). A Senate bill is in preparation.

If you did not receive a red alert
about this bill, you are not on the Action
Network. If you would like to receive future
alerts, please call headquarters, 1-800-635-
1196.

An AMA study estimated that the average cost of filing a
claim is $8.50. In addition, White House budget chief Richard
Darman suggests charging doctors a $1 “processing fee” for
every paper claim submitted, in order to raise $300 million in FY
91.

Relative Value Scale. HCFA Director Gail Wilensky,
Ph.D., has sworn to meet the January 1, 1992, deadline for
beginning implementation of the RBRVS, despite the fact that much
of the needed data won’t be available on time. The new payment
system-involving 7,000 procedure codes and 500,000 physicians-is
an administrative nightmare, dwarfing the problems with DRGs,
that involved 467 diagnoses and 7,000 hospitals.

Private insurers, following the strategic lead of Medicare,
are undertaking their own studies related to a relative value
scale. Procedure-oriented specialties are almost certain to
suffer pay cuts. Although there is concern that physicians might
drop out of some plans, insurers such as Blue Cross/ Blue Shield
may count on their large market share (and the antitrust law from
which they themselves are currently insulated) to immunize them
against physician nonparticipation.

The dangers of playing “follow the leader” were
highlighted in a classic lecture by Percy Greaves, Jr.-see the
enclosed pamphlet. (Additional copies are $10 per 100.)

IG Has List of MAAC Violators. For the first time, a
Medicare carrier has sent the HHS Inspector General a list of
doctors who have allegedly violated their MAACs, which went into
effect in 1986. This could be the beginning of a wave of
referrals to the IG, because it takes several years to establish
a pattern of “knowing and willful” violations. Some physicians
may be exceeding their MAACs without knowing it because
occasional changes are made by the carrier between annual
updates, and the carrier is not required to inform physicians.
Physicians are required to show that they have submitted
incorrect bills unknowingly. Physicians may be subject to fines
of $2,000 per violation plus exclusion from Medicare. The IG
could not say how many doctors were on the list.

Laboratory Regulations. Although final regulations
will probably not be available until the end of the year, a HCFA
draft proposal calls for federal compliance fees for physician’s
office laboratories ranging from $156 to $2,151 every two years,
depending on the number and complexity of tests performed. In
addition, the lab might have to pay from $525 to $1,155 for a
complaint investigation (unless no problem was found) and from
$220 to $560 for sanctions and hearings (unless the hearing
officer overturns the sanction). Convicted violators could spend
a year in prison for the first offense. See p. 3 for further
details.

Labs that use computers to perform testing or reporting
will also have to document preventive maintenance schedules for
the computer and system operating limits. Emergency hardware
service must be available, and access to the files must be
restricted, as by passwords.

The expense of compliance may force many physicians to
discontinue their labs, which often just break even. Congress
has not evaluated the effect on the cost and availability of
service, though it has determined that 50% of all outpatient
testing is done in physician office labs. Public health
officials are also concerned that they may have to discontinue
certain screening programs.

For stool guaiac testing, patients may have the choice of
buying a home testing kit for $8.99 (for a single test) or
delivering a specimen to a laboratory with a check for $38.55 per
specimen. Currently, some physicians will test three specimens
for as little as $5.00.

Closing the “Medigap Gambling House”. A string of
bills has been introduced to “tame” the $15 billion market for
Medigap insurance. The General Accounting Office states that
about a third of commercial Medigap insurers pay out less than 60
cents in benefits per premium dollar. The minimum federal
standard set by the Baucus Amendments in 1980 is 75 cents for
group policies and 60 cents for individual policies. The Health
Insurance Association of America states that lawmakers’ charges
of abuse are grossly exaggerated, and notes that Medigap
insurance is “the most highly regulated form of health
insurance.”

H.R. 4242, introduced by Rep. Pete Stark (D-CA), would raise
permissible loss ratios to 70 percent (from 60 percent), forbid
insurers to sell duplicative coverage, and outlaw sales to senior
Medicaid recipients.

Lab Regulations Don’t Go Far Enough

With great perspicacity and foresight, Congress has
recognized that the doctor who admits to performing a stool
guaiac might be tempted to forge ahead into reading Pap smears or
undertaking other lab tests that he doesn’t know how to do. A
$156 certificate to pay for unannounced inspections is badly
needed to prevent such malfeasance.

But if patients are threatened by unmonitored blood choles-

terol measurements, how much greater the danger from deliveries
or major surgery! A doctor who sews up a cut today might be
tempted to do a C-section or an appendectomy in his office
tomorrow. Preventive legislation is desperately needed. HCFA
should require every physician who ever touches the skin with a
surgical instrument to pay $5,000 for a certificate of waiver, if
he does only “simple” procedures, so that HCFA can afford to
send an inspector to be sure that he doesn’t require inspection.
Physicians licensed to perform complex procedures or operations
that might hurt somebody should pay more and be inspected more.
Then everyone will be safe, and our lawmakers can sleep at night.

Previous regulations of this kind were sometimes deterred by
the cost to the public treasury. This is no longer a concern,
due to the advent of user fees based on a long-forgotten (pre-
July 4, 1776) historical precedent.

The British Army collected the taxes, and the taxes were
needed to pay the British Army, which was needed to collect the
taxes, . . . .

Jane M. Orient, MD

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Federal Laboratory Licensing Now Applicable to
Physicians’ Office Laboratories

On October 31, 1988, Congress enacted important amendments
to the Public Health Service Act, expanding the certification
requirements for laboratories. The most important change in the
Act was in expanding certification to laboratories operated by
licensed physicians, which were heretofore exempt. As of January
1, 1990, the Secretary began the issuance of standards for the
licensing of all laboratories. However, the Secretary will not
begin the regular inspections of laboratories operated by
licensed physicians until July 1, 1991. Physicians will be
required to meet the personnel qualifications after that date
(See: 42 U.S.C.  263a(f) and (g).)

According to the amended act, all facilities “for the
biological, microbiological, genological, chemical,
immunopathological, or other examination of materials derived
from the human body for the purpose of providing information for
the diagnosis, prevention, or treatment of any disease or
impairment of, or the assessment of the health of, human beings .
. . may not solicit or accept materials derived from the human
body for laboratory examination or other procedures unless there
is in effect for the laboratory a certificate issued by the
Secretary [of the US Department of HHS]. . . applicable to the
category of examination or procedures” sought to be performed
(42 U.S.C.  236 a(a) and (b)). According to the amended
statute, a certificate is valid for two years (42 U.S.C. 263
a(c)(2)).

A certificate may be issued to license, or renew a license,
if the laboratory, among other things:

(1) Submits an application (on a form prescribed by
the Secretary) describing the characteristics of the
laboratory examinations and other procedures performed by
the laboratory, including:

(a) the number and types of laboratory examinations
and other procedures performed;

(b) the methodologies for laboratory examinations and
other procedures employed;

(c) the qualifications (education background, training
and experience) of the personnel directing and
supervising the laboratory and performing the
laboratory examinations and procedures; and

(d) an agreement to provide to the Secretary a
description of any change in the information
submitted.

(2) Provides the Secretary with satisfactory assurances
that the laboratory will be operated in accordance with
the standards issued by the Secretary, or, with proof
of accreditation of an approved accrediting body.

(3) Agrees to permit the Secretary to make periodic
inspections, and agrees to make records available to
the Secretary and submit reports to the Secretary as
may be required. (See: U.S.C. §263
a(d)(1).)

A laboratory may apply for a certificate of waiver and thus
be relieved of the obligations of licensure if it performs only
examinations and procedures that are “simple” (as determined by
the Secretary), have an insignificant risk of an erroneous
result, or would pose no reasonable risk of harm to the patient
if performed incorrectly; for example, tests approved by the U.S.
Food and Drug Administration for home use.

To assure compliance with regulations, the Secretary is
given the authority to make announced and unannounced
inspections, even of laboratories with certificates of waiver
(See 42 U.S.C. §263 a(f).)

Because of the sanctions that may be imposed for failure to
comply and submit to inspection, it is important that all
physicians who operate laboratories understand the requirements.
The AAPS Legal Service will help you by providing information,
including regulations when available.

Congress Moves Toward Repeal of McCarran-Ferguson: a Major
Victory for AAPS

By a nine to six party-line vote, the House Judiciary
Committee, Subcommittee on Monopolies, approved a bill that would
repeal certain aspects of the McCarran-Ferguson exemption from
the antitrust laws for the “business of insurance.”

AAPS and its legal service began a drive to seek the repeal
of the McCarran-Ferguson Act exemption nearly ten years ago.
Over the years, a coalition of consumer organizations evolved in
which AAPS became a key participant, offering testimony before
the Subcommittee on Monopolies as well as providing information
and consultation to members of the House Judiciary Committee,
including Representative Peter Rodino (D-NJ) (see AAPS
News April and May, 1987).

The bill passed by the subcommittee would eliminate the
exemptions from the antitrust laws for insurance companies that
engage in price fixing, monopolizing markets, or allocating
territories among competing companies, or that require consumers
to purchase unrelated policies.

The victory is one of significant proportions and will be
the first step in making the insurance industry more sensitive to
marketplace pressures. Such a repeal, AAPS has always contended,
will create an environment in which medical liability insurance
will be marketed more fairly and health care claims will be
adjusted with less reliance upon shared information and
anticompetitive pressures.

AAPS will provide testimony as the bill comes before the
House Judiciary Committee.

Legal Issues to Be Highlighted at Annual Meeting

If your medical staff, like many across the nation, is
revising its bylaws, you won’t want to miss the LLCS seminar in
Scottsdale, Friday afternoon, September 14. A unique program on
medical staff issues will include the use of arbitration for
resolving medical staff disputes; pitfalls in the bylaws (and why
you want your own lawyer, not just the hospital’s lawyer, on the
committee); and general principles of risk management. Speakers
include Kent Masterson Brown, Vickie Yates Brown, and Christopher
Shaughnessy of LLCS and Thomas Stipanowich, Associate Professor
of Law at the University of Kentucky College of Law.

The McCarran-Ferguson Act will be discussed by Gregg Neal,
an attorney in Shelbyville, KY, and the pitfalls of medical
welfare practice by R. Steven Geshell, who defends doctors in
Honolulu.

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Supreme Court Rules in Parental Consent and Cruzan Cases

In two significant decisions handed down at press time, the
US Supreme Court agreed with AAPS-and disagreed with the AMA-in
two cases in which the organizations had filed amicus curiae
briefs on opposing sides.

In the case of Cruzan v. Harmon, the Court ruled that in the
“absence of clear and convincing evidence” that an incompetent
or comatose patient desires removal of a feeding tube, the State
of Missouri may statutorily prohibit the withdrawal of nutrition.
AAPS argued that depriving a patient of nourishment in order to
end her life was a violation of the fundamental ethic of medicine
and was contrary to constitutional and common law (see AAPS
News 12/89).

The Court upheld the constitutionality of an Ohio statute
requiring the consent of at least one parent, or a court, before
an abortion could be performed on a minor. The Attorney General
of Ohio frequently referred to the AAPS brief in presenting his
case. The brief, which cites Minnesota Department of Health
Statistics showing a decline in teenage pregnancy rates during
the time a parental consent law was in effect, is quoted in a
January 22, 1990, report by the US Senate Republican Policy Com-

mittee.

Nominating Committee Report

W. Daniel Jordan, MD, Chairman, presents the following slate
for consideration at the 47th annual meeting:

President: Claud Boyd, MD, Augusta, GA

President-Elect: John Boyles, Jr, MD, Centerville, OH

Secretary: Donald Quinlan, MD, Northfield, IL

Treasurer: Lowell Campbell, MD, Corsicana, TX

Board of Directors: James Coy, MD, DeLand, FL; Nino
Camardese, MD, Norwalk, OH; John Dwyer, MD, Chicago, IL; and
Vernon Goltry, MD, Boise, ID.

Resolutions

To be considered at the annual meeting, resolutions must be
received in writing at least 30 days prior to the meeting by
Resolutions Committee Chairman R.S. Jaggard, MD, 10 E. Charles
St., Oelwein, IA 50662.

The Cost of Paperwork

To satisfy a requirement mandating the use of one reporting
form, an Ohio hospital had to hire one employee. If

each of the nation’s 7,000 hospitals had a similar experience,
one form would cost the nation $56 million. The cost of
preparing a Medicare or Medicaid report is about $1,000 per
nursing home per report. If each of 12,000 nursing homes prepare
1.86 reports per year, the annual cost of this paperwork is
$22,320,000 (John Goodman, The Regulation of Medical Care: Is
the Price Too High? CATO Institute, 1980).

Sequoia Hospital, a general hospital near San Francisco,
reports that since 1966 staff has increased 175%, largely to
comply with federal regulations, although the number of
inpatients remains the same. Sidney Marchasin, MD, suggests that
a mass resignation by government regulators would save billions
of medical care dollars, nationwide (Wall St J 6/26/90).

“Freedom” Is Slavery

Is the world celebrating the “triumph of liberal democra-

cy” at the “end of history” prematurely? In his book The
Anticapitalistic Mentality (Libertarian Press, 1972), Ludwig von
Mises analyzed the causes of the “overpowering momentum”
recently acquired by antilibertarian ideas.

It would have been a hopeless venture to attack freedom
openly and advocate unfeignedly a return to subjection
and bondage. But antiliberalism got hold of people’s
minds camouflaged as superliberalism. . . .It came
disguised as socialism, communism, planning.

The “end of history” became a subject of discussion rather
recently, after Francis Fukayama’s famous essay in The National
Interest in the summer of 1989. But as von Mises noted, “the
avowed end of all utopian movements is to put an end to history
and to establish a final and permanent calm.”

Von Mises warns against seeking “contentment in a system in
which [humankind’s] only task will be to serve as cogs in a
machine designed and operated by an almighty planmaker.” This
epoch of history could end as a previous one did: ruere in
servitium (they plunged into slavery), said Tacitus of Romans in
the age of Tiberius.

AAPS Calendar

Sept 12, 1990. Board of Directors meeting, Scottsdale, AZ.

Prelude to annual meeting: Bureaucrat of the Year Awards
Ceremony, Cattleman’s Cookout.

Sept 13-15, 1990. 47th Annual Meeting: The Control of Medi
cine in the 1990s. Camelview Resort, Scottsdale, AZ.

(Send in your reservation now and save! Early Bird discount
only until August 1.)

Oct 17-19, 1991. Annual meeting, Lexington, KY.