AAPS News – Aug 2002

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1601 N.
Tucson Blvd. Suite 9
Tucson, AZ 85716-3450
Phone: (800) 635-1196
Hotline: (800) 419-4777
Association
of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto

Volume 58, No. 8 August 2002

HIPAA and CODIFIED, CERTIFIED LIES

A common lie about the HIPAA privacy standards-most often a
lie of omission-is that every physician must comply. In
fact, not all physicians are “covered entities.

According to AAPS Past President Lois Copeland, M.D., of
Hillsdale, NJ, the medical staff of her hospital was told on June
21 that “(1) all physicians would now be required to
submit electronically; (2) all physicians would be
required to form and follow a compliance plan; and (3) any
patient refusing to sign the [notification of privacy policy] form was to be refused service, [lest] the physician be
considered noncompliant and in jeopardy of a $250,000 fine and a
potential jail term.”

Not so. Medicare will require “covered entities” to file
electronically after October 16, 2003, but practices with fewer
than 10 full-time employees or no means to submit electronic
claims are exempt (see AAPS News, July
2002
). Covered physicians must make a “good faith effort” to
have patients sign the notification statement, but-unlike the
previous rule’s meaningless “consent” form-a signature is not
required to obtain treatment (
www.hhs.gov/ocr/hipaa/propmods.txt
).

Physicians can remain or become non-covered, but to maintain
this status requires vigilance. They must read all
contracts and certifications
and avoid becoming a
business associate of a covered entity such as a hospital.
According to attorney Vickie Yates Brown, hospital general
counsels are asking whether they need to obtain such contracts
with medical staff members. The answer is no; the
regulations specifically state that physicians do not become
business associates simply through membership on the medical
staff.

Physicians need to understand clearly the implications of
being a covered entity. One consideration is cost-which is so
prohibitive that some “industry players” are asking whether it
would be less costly to choose not to comply and simply to pay
the penalties as a cost of doing business.

John Stephens, J.D., in a PriceWaterhouseCoopers
publication, April, 2001, warns that the highly prescriptive
rules are costly to implement and maintain, but easy for HHS to
audit. With a maximum annual penalty of $25,000 for violating
each “provision” of the three HIPAA standards, the cost of
complete noncompliance could reach $1.4 million per year. If HHS
counts “provisions” in a less simplistic way, the cost could be
far higher. Moreover, failure of a covered entity to make a good-
faith compliance effort might be interpreted by law enforcement
agencies as the “intent” or “false pretenses” necessary to
trigger the criminal penalties.

An even greater threat, Stephens points out, arises from
statements certifying HIPAA compliance. These may be required by
accreditation bodies such as NCQA and JCAHO, state regulators and
licensing agencies, or federal programs including Medicare,
Medicaid, and the Federal Employee Health Benefit Program. If a
false certification is discovered-as through a bounty-seeking qui
tam whistleblower-all the draconian penalties of the False Claims
Act (FCA) could also be triggered (

pwchealth.com/articles.shtml
).

Despite a couple of court decisions (Mikes, AAPS
News
, Feb 2002, and McLaren,
AM News, 3/11/02) that might help put the brakes on the
use of the FCA in actions arising from “tainted claims” (AAPS
News
, Dec 2001), Senator Charles
Grassley (R-IA) is pressuring the Dept. of Justice to “clamp down
on kickback prosecutions under the False Claims Act”
(Medicare Compliance Alert 7/1/02). In a “surprisingly
radical” Fifth Circuit decision in U.S. v. Southland
Management Corporation
, the Court took the view that “a
false certification will result in a false claim as a matter
of law
if the making of the certification is required as a
condition for payment….”

A dissenting opinion stated: “the government need only
incorporate boiler-plate certifications of compliance with `all’
statutes and regulations to put in play punitive FCA sanctions
for most government contractors or beneficiaries.” Moreover, the
fact of participation in a government program could constitute an
implied certification (Pogue v. American Healthcorp):
see BNA’s HCFR 6/12/02, pp. 501-507).

Besides the penalties for imperfect compliance with the
“Highly Impossible Privacy Achievement Act,” reasons to take the
“country doctor’s escape route” include protecting both patients’
rights and your ability to practice good medicine.

For a privacy notification statement, a physician might as
well give patients a Miranda warning-with the new proviso that
physicians have no right to remain silent about
confidences. The rules not only permit but enable fishing
expeditions in a national data base, as to monitor “leading
health indicators” such as obesity, sexual activity, and mental
health, or to “leverage the existing health system” to achieve
societal goals such as “eliminating health disparities” (NCVHS
testimony, 12/14/01)-say better treatment of certain patients.

Adherence to the transaction code sets rules will dramat-

ically change information systems, as all are forced to adopt a
centrally mandated code set, possibly the ICD-10, which has
200,000 codes. Yet non-reimbursement codes are acknowledged to
have an inaccuracy rate of 30 to 40% and lack a way to express
basic concepts such as “blood pressure measurement” or “prenatal
visit” (NCVHS testimony 4/15-16/97). It’s as though records had
to be translated from English into Navajo and back again, with
severe punishment for inaccuracies. In the name of advancing
information technology, every medically related fact, diagnosis,
or procedure will have to be numerically coded even though
computers now have an awesome capacity to handle natural
languages. Records will be increasingly unusable for medical
treatment, and full of unavoidable untruths. Only country doctors
will be able to practice medicine.

HIPAA must be resisted, stopped, and turned back.


Lessons from Microsoft?

Do we need the federal government to dictate a standard
format for medical information transfer? We don’t need it to tell
us what programming language or word processor to use.

The Dept. of HHS writes: “Without government action, a
common standard might eventually emerge as the result of
technological or market dominance. However, the uneven
distribution of costs and benefits may have hindered the
development of a voluntary industry-wide standard. Congress
concluded that the current market is deadlocked and that the
health care industry would benefit in the long run if government
action were taken now to establish an industry standard”

(Federal Register, vol. 65, No. 160, 8/17/00, p. 50351).

Translation: Users don’t agree on the best standard. Only
the federal government can force some to bear net costs for the
net benefit of others. Certain segments of the industry-such as
the AMA-will benefit if their codes are imposed: no need to
display the innovative genius of Microsoft, or risk antitrust
prosecution for achieving predominance in a voluntary market.
We’ll be better off in the long run using what may be the
equivalent of COBOL or WordStar until 3001.

CPT Confusing, Subjective

You may have already noticed this, but now it’s documented
in a study done by members of the American Health Information
Management Association. Specialists with an average of 10 years
coding experience agreed on the CPT E&M codes for six cases only
59% of the time-a performance only slightly better than that of
physicians (FP News 2/15/02).

Opting Out Spreads

It’s not just doctors: Home Depot has instructed its stores
not to do business with the federal government to avoid having to
comply with burdensome paperwork (Wall St J 6/18/02).

Although not actively encouraging physicians to opt out, the
Washington State Medical Association now offers a guide for
physicians who wish to do so (
www.wsma.org
, under “reference materials” on the
Membership/Resources page).

RIP, Andrew Mance, M.D., Country Doctor

Andrew Mance of Oakland, MD, died quietly at home at the age
of 87-on Independence Day, July 4, like two other American
freedom lovers, John Adams and Thomas Jefferson. Dr. Mance served
patients in general practice from 1939 until a few days before
his death. He never accepted a dime from government programs. He
joined AAPS in 1966 and served on the Board of Directors in the
early 1990s. He was honored by 600 patients (AAPS News, May 1996). In Thoughts-of a Country
Doctor, an Immigrant’s Son-in Poetry
, he wrote:

Who, /Am I?

Do you see/ That building over there?

No, no/ The tallest one.

I am a grain of sand/ In the foundation.

I, am important.

Without me the building/ Would be incomplete;

I am a necessary bit/ In God’s creation.

Nominating and Resolutions Committee Reports

The following slate will be presented at the annual meeting:

President-Elect: Dr. Mark Schiller of San Francisco, CA

Secretary: Dr. Charles McDowell of Alpharetta, GA

Treasurer: Dr. R. Lowell Campbell of Corsicana, TX

Directors: Drs. Claud Boyd of Augusta, GA; John Boyles, Jr.,
of Centerville, OH; Curtis Caine of Brandon, MS; James Coy of
Punta Gorda, FL; Mary Jo Curran of Chicago, IL; Thomas Dorman of
Federal Way, WA; W. Daniel Jordan of Atlanta, GA; and Delbert
Meyer of Sacramento, CA.

Resolutions are due by Aug. 18. (Call 800-635-1196.)

Model Emergency Powers Faltering

AAPS General Counsel Andrew Schlafly writes: “I have
reviewed the current status of state consideration of the
Clintonesque Model State Emergency Health Powers Act (MEHPA), an
appropriate task for Independence Day.”

He found that 7 states had enacted portions of MEHPA:
Arizona, Florida, Georgia, Maine, Maryland, Minnesota, and New
Hampshire. No state has passed all, or nearly all, of the Model
act. States that effectively rejected MEHPA by passing an
alternative include Louisiana, South Dakota, Utah, and Vermont.
States that rejected or shelved it: California, Connecticut,
Idaho, Illinois, Kansas, Kentucky, Mississippi, Nebraska,
Oklahoma, Washington, Wisconsin, and Wyoming.

“We’ve done well in fighting it,” he said.

Mr. Schlafly will debate a public health official in
Florida, which passed the worst bill. Citizen activists are
trying to get the bill rescinded.

Medical Savings Account Projects

A group of physicians, insurance agents, and others is close
to the $30,000 in tax-deductible pledges required to launch a
radio talk-show campaign to educate the public and Congress about
the need to lift the crippling restrictions on Medical Savings
Accounts. Also, the MSA audio/videotape program developed by the
Pennsylvania chapter of AAPS is available. If interested in
either project, call Dr. Jim Pendleton, (215) 938-0781, FAX (215)
938-8999; [email protected].

AAPS Calendar

Sept. 18. Board of Directors meeting, Tucson, AZ

Sept. 18-21. 59th annual meeting, Tucson, AZ.

Sept. 24-27, 2003. 60th annual mtg, Point Clear, AL.

* * *

“The simple step of a courageous individual is not to
take part in the lie. One word of truth outweighs the
world.”


Alexander Solzhenitsyn


Privacy Suit Dismissed; AAPS to Appeal

On June 17, Judge Sim Lake of the U.S. District Court for
the Southern District of Texas granted the government’s motion to
dismiss the case brought by AAPS, Rep. Ron Paul, M.D., and others
challenging the HIPAA Privacy Rule.

The Judge held that the claim was not ripe: “Plaintiffs have
not alleged that the government has accessed their medical
records pursuant to the Privacy Rule.” Before plaintiffs could
suffer harm, “The Secretary of HHS would have to elect to
exercise his oversight responsibilities…and would then have to
proceed directly against the specific covered entity that
possessed the protected health information of the plaintiffs.
Even in such a scenario, the plaintiffs’ particular health
information might not be accessed or disclosed.”

Before April 14, 2003, HCFA might issue new rules
rendering the complaint moot, and to adjudicate the claim in the
preenforcement stage “would pose a risk that the court would
issue an impermissible advisory opinion.”

The Judge agreed with HHS that expanding the rule beyond the
electronic information specified by Congress “effectuates HIPAA’s
intent to promote the computerization of medical information.”
[We’ll see.]

AAPS will file a notice of appeal soon.

Lawyers Sue over Privacy Rule

For only the second time in its 125-year history, the New
York State Bar Association has filed suit against the federal
government. The suit challenges the application of the Gramm
Leach Bliley (GLB) Act to lawyers. GLB requires financial
institutions to send privacy notices to their customers.

“Lawyers are already subject to strict ethical rules,…
requiring us to keep client confidences and secrets. It is
bureaucratic, unnecessary, and inefficient to require that we
send out `privacy notices’ as well,” stated NYSBA President
Steven C. Krane (nysba.org
).

Defining a Federal Crime

For any act to be criminal, Congress is supposed to enact a
law giving clear notice of what constitutes a crime so that
citizens will know how to behave. Though generally not very
concerned about physicians indicted for Medicare fraud, the press
has discovered, in the trial of the accounting firm of Arthur
Anderson, that “it is often very difficult to know what does and
does not constitute a federal crime.” Andersen was convicted of
felony obstruction of justice when the jury agreed that staff
attorney Nancy Temple acted with “corrupt intent” in advising a
partner on the Enron account to delete a passage from e-mail. The
original jury instructions defined “corruptly” to mean doing the
specified act with “an improper purpose” – a statement of law so
broad to permit a conviction for almost anything. But somebody
had to be convicted of something.

“They just forced us to come up with a guilty verdict,”
juror Wanda McKay told The New York Times.

Judge Melinda Harmon did what Congress is forbidden to do:
create a new crime ex post facto, stated John S. Baker, Jr.,
professor of law at Louisiana State University. And if the
standards to which Andersen was subjected were applied even-
handedly, the FBI would be in the dock for mishandling reports
from field agents about possible terrorist activity prior to the
Sept. 11 attack (Wall St J 6/18/02).

Anti-Fraud Agency Destroys Documents

Facing an embarrassing audit of its own operations, which
“could adversely affect the confidence of the public” in Defense
Department audits, the Pentagon agency charged with exposing
fraud simply destroyed documents and faked new ones. IRS
reviewers found no problem with the phony documents, which were
brought to light by a whistleblower. Twelve to fifteen officials
in the DoD inspector general’s office were involved in creating
the false documents, at a cost of $83,000 to taxpayers
(Peoria Journal Star 6/6/01).

Medical Schools Pay $117 Million

In settlement of fraud allegations, the HHS Office of
Inspector General has “recovered” $117 million as a result of the
Physicians at Teaching Hospitals (PATH) Initiative, plus $50.9
million from similar audits initiated by local authorities. The
highest settlement of $30 million was paid by the University of
Pennsylvania. Many complaints focused on lack of adequate
documentation of faculty supervision of work done by resident
physicians-using stricter guidelines than those in force at the
time services were rendered (AM News 6/3/02). The cost
of the Corporate Integrity Agreements and new compliance plans
was not estimated.

Tip of the Month: The misnamed Health Care Quality
Improvement Act (HCQIA) confers qualified immunity on peer review
committees that revoke hospital privileges. Such immunity applies
only to the extent that the committees act based on a reasonable
belief in improving health care, after a reasonable effort to
obtain the facts, and after adequate notice and hearing
procedures. Many state laws also confer immunity limited to good
faith peer review. Yet some hospitals now seek “absolute
immunity” by demanding that physicians contractually waive their
rights, which would preclude relief even for bad faith peer
review. Such demands are inconsistent with federal and state
laws, and are typically contrary to the interests of physicians
and their patients. Waiving rights often leads to regret.

Informed Consent for Abortion

A consent form used by Women’s Choice Quality Health Center
in San Antonio, TX, includes warnings of the risk of an
incompetent cervix and a possible increase in lifetime risk of
breast cancer. Brent Rooney of the Reduce Preterm Risk Coalition
(RPRC) queries whether this increases the malpractice exposure of
abortionists who lack such a form.

Rooney also cites studies showing that a previous abortion
increases the risk of preterm births-doubling the risk of births
at less than 34 weeks’ gestation-and that no abortion clinics
mention this risk (BMJ 2001;322:430).

The RPRC has announced a $444 prize to the first person to
send a copy of a significant study showing a lower 12-month total
mortality for women having an elective abortion compared with
women carrying to term. This would tend to refute a study showing
a 250% increased mortality in the year following the “end of
pregnancy” through abortion rather than live birth (Acta
Obstet Gynecol Scand
1997;76:651-657).

In supporting the Abortion Non-Discrimination Act (ANDA),
H.R. 4691, AAPS states that physicians may decline to do
abortions because of concerns about women’s health.


Correspondence

First HIPAA Ripple. This past Sunday I had to perform
carotid duplex scans on two patients with transient ischemic
attack/stroke symptoms. I customarily follow good medical
practice and compare the study with previous scans. But HIPAA
stopped me from doing this. The cabinets containing the studies
were securely locked. The hospital official in charge explained
that they couldn’t allow housekeeping staff to be around the
unlocked files in the locked neurology department because of
HIPAA privacy standards. None of the neurologists were supplied
with keys to the cabinets. I’m sure patients will be comforted to
know that while they’re having a stroke, their records are secure
so that even their own doctor can’t see them.

The government is hog-tying doctors and partially gagging
them, while constantly maligning them and poking them with
sticks. Occasionally the government unties one hand so the doctor
can reach into his pocket to pay increasing liability premiums
for the privilege of participating in this game. It will end only
when patients finally realize that the benefits of “free” medical
care are outweighed by the consequences of being treated by a
government hog-tied doctor.

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

Medicare+Choice. The July Report from Washington stated
that Medicare+Choice programs have served many seniors well. My
experience has been completely the opposite. Most of my patients
leave these plans.

Leonard Biel, Jr., M.D., New York, NY

Corruption Is Contagious. When anyone finds a way to
gain an advantage with deception, others will copy the scam. When
people can’t trust each other, much effort is wasted and every
transaction is complex because of the need for self protection.
The result is like an engine with so much internal friction that
there is little net horsepower.

In impoverished countries, hard workers are considered
stupid, and successful deceivers, intelligent. Now that plunder
seems to make more sense than creative, productive work, wealthy
America is on its way to Third-World poverty.

Ralph Rohweder, Alexandria, VA

Republicans Confess to Grand Larceny. Arizona
Republicans Hayworth and Shadegg are running commercials bragging
about “giving” seniors a new prescription entitlement, as if the
money were coming from their pockets instead of being taken from
taxpayers. They and the rest of the U.S. House of Lords should be
put in stocks on the Capitol Mall, where children can “stone”
them with McDonald’s Happy Meals. After all, it is the children
who will spend much of their adult lives paying off the looming
Medicare and Social Security debts….

There are noble-sounding arguments for all entitlements.
Proponents never say “I’m buying special interest votes with your
money” or “this free goody will have bad consequences, but I’ll
be retired on a princely pension by then.”

The Framers thought that stealing was wrong, and
philanthropy was a private matter. Now their successors not only
steal but brag about it.

Craig Cantoni, Scottsdale, AZ

Actuaries Feel No Pain. Actuaries believe that
everything in the universe can be reduced to a mathematical model
that can be tweaked and manipulated. When real-world experience
doesn’t correspond to the model, the real world must be wrong.
When doctors can’t make the Marxist Labor Theory of Value (the
RBRVS) work, the doctors can be thrown in jail for Medicare
fraud-but not the actuaries who designed it. Having agreed to
artificial prices for virtually every transaction, HMOs,
hospitals [and doctors] are now having to live with them.

Gerry Smedinghoff, Phoenix, AZ

Duping the Public. Since 1943, there have been no real
prices for medical services in the U.S. In fact, all prices are
distorted by $600 billion in dead-weight costs of the transfer
society. Managed Care and Single Payer both dupe the public by
eliminating prices, but not costs. The result is impoverishment:
witness Canada’s 50-cent dollar.

Robert Gervais, M.D., Mesa, AZ

Market Prices = Democracy. The market is the closest
mechanism to democracy that we have. People can’t vote on every
issue, but with the market, they vote with their money on every
good or service that they buy. Patients who are free to go
elsewhere are far more effective in controlling cost and quality
than insurance or government inspectors or regulations. When Marx
called our system “capitalism,” it caused some to focus on the
evil in corporations. In fact, the essence of our system is
consumer choice; capital accumulation is just a tool of market
operation. Efforts to replace consumer choice with government
control (a system called “fascism”) are based on faulty, mystical
assumptions about human nature-and result in inefficiency, poor
service, and grave danger.

James Pendleton, M.D., Bryn Athyn, PA

Trust Funds. Comments from a physicist: Governments
should not be permitted to create the fiction of a trust fund.
Salivating politicians and lobbyists spend most of their time
figuring out how to tap it for the projects that do them the most
political good-before someone else does.

Steve Barchet, M.D., Issaquah, WA


Legislative Alert

House Passes Medicare Legislation

Just before the July 4th recess, a bitter debate on
Medicare ended in a close vote at 2 A.M. on June 28th. The House
passed the Medicare Modernization and Prescription Drug Act (H.R.
4954) by a largely party-line vote of 221 to 208. The House
Republicans’ Medicare drug benefit has been estimated to cost
$311 billion over 10 years, a significant increase over
the Bush $190 billion proposal, but within the budget constraints
agreed upon by the House of Representatives this year. Before
final passage, House Minority Leader Richard Gephardt offered a
motion to recommit the bill with instructions to report out the
Democratic Leadership bill, the Medicare Prescription Drug
Benefit and Discount Act, but Gephardt’s motion was defeated by
223 to 204. Gephardt launched into a hot tirade about the House
leadership’s procedural hurdle and described the Republican
legislation as a “sham” and a “fraud.” Meanwhile, the
Congressional Budget Office (CBO) estimated the cost of the
Democrats’ proposal at about $1 trillion over ten years.

Pay Adjustments for Doctors and Medical Facilities

The House bill provides for Medicare pay increases of
2% in 2003 and payment updates in 2004 and 2005 based on 2002
data. The total five-year estimate of the physician pay
adjustments would amount to $21.3 billion. Under the terms of the
bill, however, physicians would see a decrease in
Medicare payment beginning in 2008
. Thus, the Medicare
administrative payment system and its price controls remain.

For hospitals, the Medicare reimbursement would amount to a
$3.6 billion increase over the next ten years. Under the House
bills, the hospitals would get an inflation update, with a slight
modification in the formula. For skilled nursing facilities,
there would be an increase in their prospective payment of 12%
for 2003, 10% for 2004, and 8% for 2005. The House formula
changes would reverse the impact of current Medicare law, which
would otherwise have resulted in a $3 billion reduction in
Medicare payments for fiscal year 2003. For home health agencies,
the House bill eliminates a projected 15% Medicare payment
reduction effective on October 1, 2002.

The House bill contains a variety of miscellaneous
provisions governing payment for rural hospitals, durable medical
equipment, the provision of new Medicare coverage for physical
examinations and cholesterol screening. It also has incorporated
Medicare regulatory relief provisions.

Changes to Medicare MSAs and Medicare+Choice

The House bill permanently extends the Medicare Medical
Savings Accounts and removes caps on enrollment
and also
makes some genuine improvements in the beleaguered Medicare
+Choice program. The bill changes the formula for paying private
health plans to the higher of the adjusted average per
capita cost (AAPC) or 100% of the Medicare fee-for-service plan.
(The AAPC formula determines payment by dividing the number of
Medicare patients into the cost of providing that care in any
given county). In the meantime, Medicare+Choice plans would be
able to apply for payment based on a statewide, rather than
countrywide area. Also, Medicare patients would be able to keep
75% of any savings from enrolling in Medicare +Choice; the
government would retain the other 25%. The bill also creates a
four-year demonstration program to establish full competition
between Medicare+Choice and fee for service, which would commence
if there are at least two Medicare +Choice plans and they would
enroll 50% of all seniors.

The House Drug Benefit

The major provision of the House-passed bill was the
addition of a multibillion dollar drug benefit, explicitly
created as a new entitlement-meaning, of course,
that it will be like any other Medicare benefit, and will be
progressively subject to legislative and bureaucratic
restrictions.

The House bill provides for the drug benefit with a $33-per-
month premium, with a $250 annual deductible, delivered through
private health insurance plans. Beyond these premiums and
deductible standards, the drug benefit would have a sliding scale
of government subsidies depending on the cost of the benefit.
With lowest costs, running between $251 to $1,000, the Medicare
patient would pay only 20%. When costs run between $1,001 and
$2,000, the Medicare patient would pay 50%. When costs run
between $2,001 and $3,700, the Medicare patient would pay 100% of
the costs, but at a 30% discount. For any prescription drug costs
above $3,700, the federal government would pick up the entire
bill. At the same time, the bill provides for explicit means
testing
for seniors who participate in the drug program. For
seniors below 150% of the official poverty line, the federal
government would pick up the full cost. Federal subsidies for
Medicare patients would phase out at 175% of the official level
of poverty.

A Medicare Benefits Administration would oversee both the
drug benefit program and Medicare+Choice. The stated objective is
to create a new agency that would be more market friendly than
CMS, the successor to HCFA. (We’ll see.) The bill also sets up a
Medicare Prescription Drug Trust Fund.

The House bill is fairly prescriptive. Under the terms of
the legislation, private plans must issue prescription drug care
to Medicare patients and have a “cost and drug utilization
management program.” While private companies are to offer the
drug benefit, the prescription drug plans must have a pharmacy
network of at least two pharmacies, and a point-of-service option
that allows seniors to go outside of the pharmacy network. The
bill also provides for subsidies to employers, presumably as an
incentive for them to maintain coverage. The federal contribution
to employers would be 67 cents on the dollar for the premium of
each Medicare beneficiary when the plan provides the standard
drug benefit package embodied in the bill. Obviously, the
incentive for employers is to drop private coverage if it does
not or will not meet the government standard. (In an earlier set
of talking points, House Republican staff circulated an estimate
from CBO that said that 90% of seniors would likely end up in
their new drug program. So, in effect, like the legislation
authored by Senate and House leftists, the House Republican
plan would surely displace the existing private market for
prescription drugs
.) The estimated cost of this proposed drug
benefit would amount to $311 billion over ten years.

“The Drug Doughnut”

The exposure of Medicare patients to the progressively
higher share of drug costs between the first $2,001 and the
$3,700 cap-the hole in the middle of the benefit subsidy-is what
Democratic critics have been calling “the Doughnut.” It is not
clear why the government contribution gets progressively less as
the drug costs mount; this is the reverse of most normal
insurance arrangements. It is clear that this curious
architecture will put a brake on rising costs. Whatever its
analytical merits, it is a politically difficult sell to ordinary
folks, who are trying to grasp the rationale for the government
paying such a high portion of smaller, up-front costs, but
leaving them vulnerable to progressively higher costs until they
reached $3,700 or more.

The “Doughnut Issue” has been a tough one for the GOP to
handle in the media. House Republicans have responded to this
criticism by saying that their proposal is the only Congressional
proposal-now on the table-that lowers drug
prices for seniors and gives all seniors an immediate drug
discount of 15%
, including the discounts for costs between
$2,001 and $3,700. In a remarkable turn of political rhetoric,
House Speaker Dennis Hastert has issued talking points that
proudly make the argument that the House Republican Plan lowers
the seniors’ prescription drug costs by “cutting into the
bottom line of the pharmaceutical companies
through best
price competition and the promotion of generic drugs.”
(Ironically enough, the piece is called “Reality Check: Exposing
Democrat Hypocrisy on Which Plan Really Benefits Prescription
Drug Companies,” produced by the Speaker’s Prescription Drug
Action Team.) Price competition does lower costs, of course. But
what is so odd about this is the Leftist slant to the House
Republican rhetoric: the pharmaceutical companies are the
problem, and a celebrated policy objective is to cut into “the
bottom line” of the most research-intensive industry in the
world. Why would a sane person want to cut into the bottom line
of an industry that commits a higher percentage of sales
revenues, roughly 20%, to research and development than any
other? Moreover, the average profit margin of pharmaceuticals is
high, but not out of line with profit margins in banking or real
estate or communications, while the pharmaceuticals’ tax
liability (at 33.8%) is higher than all other industries. This is
now the House Message. That’s what happens, of course, when you
don’t have a clear vision of your own and you are reduced to the
pathetic spectacle of borrowing the language and symbols of your
opponents to “stay in the game.”

House Republicans have been aided in their battle by the
issuance of a Department of Health and Human Services (HHS)
report favorable to their legislation, which said that the House
bill would cut prescription drug costs: “Those who now pay full
retail prices would typically see the costs of each prescription
cut by 60 to 85%, and their overall out of pocket drug costs
would fall by as much as 70%.” The HHS report also makes the
standard “economies of scale” argument
: “The savings from the
House Republican plan include a substantial price discount, made
possible by letting all seniors aggregate their purchasing power
for the first time. It’s common sense to give them the same
means to get lower drug prices that are widely used for those
under 65.” So says HHS.

As this Medicare prescription drug debate matures, watch
how the “economies of scale” argument becomes a weapon of choice
for the Left. It is an effective weapon in the real campaign
against consumer choice
, price competition, and free markets.
It easily becomes the economic argument for national health
insurance programs
and direct purchasing of medical services
by the government. If the taxpayers, through an act of Congress,
just purchased all of the prescription drugs now and up-ended
this inefficient private market, then the government could
directly provide prescription drugs more cheaply for everybody,
and they could do the same for medical devices, hospitalization,
and physicians’ services. Even better, not only could the
government get those costs down, it could pass laws, rules, and
regulations to keep them down. And, of course, we could do the
same for food, clothing, housing, daycare, video games, lemonade
stands-you name it. The essence of the nineteenth century
Socialist argument was-and is-that government is not only more
“equitable” in its distribution of goods and services, but also
more efficient and productive.

The HHS report argues that House and Senate Democrat
proposals, with projected costs running between $600 and $750
billion over ten years, would end up raising the costs of most
prescription drugs by 15% or more, encouraging a price explosion
and inviting, no, pleading for, price controls on prescription
drugs
. The House Speaker’s Prescription Drug Action Team
correctly note that House and Senate Democrats have offered
legislation that incorporates no serious price competition. The
Democrats’ proposals use direct subsidies rather than an
insurance mechanism to finance and deliver the benefit, with a
co-payment structure tilted toward generics. In the leading
Senate Democrat plan, seniors would pay a $10 copayment for the
purchase of generic drugs, the cheaper drugs, but a $40 copayment
for the original or the brand-name drugs. Nonetheless, with no
functioning market and no price competition to control costs, the
incentives are still to increase costs. But that would only lay
the groundwork for the next Leftist policy objective: price
controls. After all, health policy analysts on the Left, and
their political allies in Congress, like price controls,
believe in price controls, and can’t wait to
impose price controls. They will only refer to them as “spending
controls” or “cost controls,” or some other such language
designed to insult your intelligence.

Design Problems

If one considers the House Republican “Doughnut” a
design problem, then one must ask why the Senate Democrats want
to go through the elaborate process of setting up a Medicare
prescription drug benefit within the current Medicare program and
then sunset it in 2010. This is a new creation: A
Temporary Entitlement
. Curiously, the Senate Democrats’
legislative
proposal would suddenly end the Medicare
prescription drug benefit at the very same time that massive 77
million Baby Boomer generation starts to retire
. Just why
Senate Democrats propose to do this is unclear on the face of it,
but Capitol Hill observers think that the main reason is that the
price tag on the leading Democratic bill would produce sticker
shock in any responsible person who is not already paralyzed by
the public cost of liberal political promises. A temporary
entitlement? Don’t worry, they don’t mean it.

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

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