AAPS News – Dec 2002


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Volume 58, No. 12 December 2002


As of October 16, 2002, nearly three-quarters of the
estimated 2 million HIPAA-covered entities are probably out of
compliance with the law and subject to enforcement action.

CMS has received only some 550,000 requests for a year’s
extension on compliance with the transaction code sets; because
more than 40,000 are on paper, the final count is not yet
available. Although it is theoretically possible that the vast
majority of covered entities have tested and are using the
prescribed standards, this is highly unlikely. CMS itself
is not in compliance
, partly because it anticipates
further changes in the rules (Karen Trudel, quoted in AM
10/2/02). A radically different code set could be
adopted in a few years, making all the work on meeting current
HIPAA standards obsolete (ICD-10 on the Horizon, J AHIMA

For physicians entering practice after October 15, 2002,
there is no way to obtain an extension. If they cannot
accomplish a task that has proved impossible for large
established practices, they will be violating federal law-unless
they are noncovered entities. By federal law, they could be
excluded from Medicare for using covered electronic transactions,
even if required by insurers or State law.

Pervasive noncompliance puts CMS in a quandary. Could it
really exclude more than 70% of physicians from Medicare and
Medicaid, the penalty enacted by Congress?

At present, enforcement will be complaint driven. A form for
submitting a complaint can be downloaded from
. According to Karen Trudel, Elizabeth Holland, and other
officials on an October 30 conference call, a covered entity will
have the opportunity to file a corrective action plan before an
enforcement action occurs. Obtaining compliance, not punishment,
is the stated objective. Rules for enforcement actions are being

Confronted with the low rate of compliance, CMS is revising
its estimates. Many of the entities it assumed to be covered are
apparently small practices that plan to continue filing paper
claims and remain noncovered; thus it is pretty good to have
received 550,000 requests for extension after all.

In fielding questions from providers participating in their
conference call, CMS officials admitted to not having all the
answers. For example, how is full-time employee defined in
determining whether a practice is small enough to qualify for an
automatic waiver from the Medicare electronic claims filing
requirement? (Rules are pending.) Does a physician owner count?
(Probably.) Can an office required to file electronically
continue to use paper for necessary corrections? (Not yet
determined.) Are electronic claims required when Medicare is a
secondary payer? (More rules are needed.)

CMS did clarify what types of transactions trigger the
application of HIPAA rules. A fax originating as a piece of paper
is not considered an electronic transmission, even if received by
a computer modem. Querying a web browser to determine eligibility
makes you covered. Getting the same information by telephone

A representative of the American College of Physicians asked
for the date after which a single electronic transaction turns a
practice into a covered entity (April 14, 2003), and whether that
status is reversible if one decides to revert to paper claims
(probably so-the Office of Civil Rights is still developing
guidance on that question). The key issue from an enforcement
standpoint, in CMS’s view, would be whether an entity was covered
at the point in time when an alleged improper disclosure
occurred. Further clarification was promised on the CMS
Frequently Asked Questions site-but the CMS expert cautioned
against construing any of her remarks as legal advice.

It is absolutely clear that CMS recognizes that noncovered
entities are not subject to HIPAA. Its web site has an flow chart
for determining your status.

Organized medicine, including the California Medical
Association, also has conceded that physicians can be noncovered,
though claiming that physicians will ultimately save money
through HIPAA administrative simplification (Southern
California Physician
, Sept. 2002). AAPS has asked to see the
evidence for that assertion.

Companies hawking compliance materials may claim that there
is nothing to fear from enforcement unless one deliberately
flouts the law (see p. 3 for precedents involving the fraud-and-
abuse portions of HIPAA). They may also claim that compliance is
easy-if and only if you buy their materials.

But according to CMS, HIPAA is larger and more complex than
Y2K. Y2K was strictly a systems issue. These issues imposed [by
HIPAA] on administrative operations affect everything from
document storage, to medical procedures coding, to customer
service. As vendors explain, HIPAA dramatically affects the
culture of medicine.

CMS posts rules and interpretations on its web site, and you
may address questions to
[email protected]
. To request notification of future
conference calls, send an e-mail to [email protected]
Expensive advice from the burgeoning compliance industry will not
be any more authoritative. Be sure to document CMS statements.
AAPS members have access to our Limited Legal Consultation
Service, and all may view and post messages on our forum (

or click on Forums at

Those who do not recognize the authority of the federal
government to dictate every aspect of communication with their
patients-and who yet respect the rule of law-have only one
choice: be a noncovered entity. Withdrawal from HIPAA’s
jurisdiction may mean forgoing some of the wonders of modern
technology-until the HIPAA monster is repealed.

A National Medical Database

According to critics, AAPS’s warning about government access
to all American medical records is pure alarmism.

One of [AAPS’s] inaccuracies is that there is a national
computer data base into which all patients’ records will be put
if their healthcare providers are covered by HIPAA. This is
simply false; there is no such database (S Calif Phys,
op cit.).

The truth is that HIPAA itself does not create the
database-it already exists. HIPAA enables and
facilitates its expansion and use, especially after unique
identifiers are issued.

CMS itself states that it possesses the nation’s largest
collection of health care data (consisting of over 60 systems of
records), with information on over 74 million Americans (Federal
Register 2002 (Oct 7);67(194):62482-62486).

As permitted under HIPAA, information retrieved from this
system of records will be used to support regulatory,
reimbursement, and policy functions performed within the agency
or by a contractor or consultant; support constituent requests
made to a Congressional representative; and support litigation
involving the agency.

CMS is just now proposing a Privacy Accountability Database
(PAD) to track disclosures allowed by HIPAA.

Any disclosure for routine use-that is, for a purpose
compatible with the purpose(s) for which the information was
collected-may be disclosed without the individual’s consent.

Electronic Claims Require Reams of Paper

Those who hope to lower overhead by filing electronic
claims, thus becoming a HIPAA-covered entity, need to warm up the
copy machine. But don’t bother to invest in professionally
printed documents-anticipate frequent change. The privacy
notification should state that the provider reserves the right to
change its privacy practices at any time, and apply the new
practice retroactively to all records.

The privacy notification cannot be short-it must contain the
laundry list of HHS requirements. Nor can it use a cookie cutter
approach, as it must reflect what actually happens in your
facility. And do not forget the need to accommodate non-English
speaking patients. The Office of Civil Rights is in charge of
enforcing both the privacy rule and the language rule (Eli
Research, Health Information Compliance Alert 9/02).

Chaos in April, 2003?

Unless CMS improves educational efforts by several orders of
magnitude, enforcement of the Privacy Rule could cause widespread
disruption of the health care system, a letter from the National
Committee on Vital and Health Statistics (NCVHS) warns HHS
(HIPAA Compliance Alert 11/02).

Covered entities face endless requirements from the
transaction code sets rule, the Privacy Rule, and the terminally
delayed security rule. Requirements might include penetration
testing (attempting to hack into your own computer firewall);
employment of an experienced security officer (for which
potential demand greatly exceeds supply); special ID for mailroom
personnel; and reinforced locks and sensors to block mailroom
access by nonauthorized personnel (ibid.).

Napa County, California, employed 400 people to fill out
data flow maps for departments affected by the Privacy Rule,
tracking every copy of every item (ibid.).

Covered entities must build enthusiasm, say experts.

Doctors Not Ready, Not Informed, Unenthusiastic

Of 418 non-AAPS members who returned a survey card from a
mailing on the possibility of being noncovered under HIPAA, only
13% agreed with the statement my office will be ready to comply
with HIPAA in time for the deadlines, while 46% disagreed and the
rest were not sure. Only 17% agreed with the statement I was
previously aware of the `country doctor’ exception; 73% disagreed
and 6% were not sure. The 68 estimates of compliance costs ranged
from $25 to $350,000, with a mean of $15,500 and a median of

Doctors’ open-ended comments on HIPAA are posted at
www.aapsonline.org (click on country doctor escape

Republicans need to repudiate the administrative
simplification section that they-apparently unwittingly- lifted
word for word from the Clinton plan for the government takeover
of American medicine. That’ll never happen, stated a promoter of
compliance software.

We’ll see, replied AAPS Executive Director Jane Orient. When
have doctors ever tried an approach other than rolling over for
the latest government intrusion?

Markey Introduces Consent Act

Recognizing that HIPAA gives regulatory permission for
nonconsented disclosure of virtually all personal health
information-recorded in the past, present, or future-Rep. Edward
Markey (D-MA) introduced H.R. 5646, the Stop Taking Our Health
Privacy Act (STOPH) of 2002. This bill would essentially override
the Bush Administration’s August, 2002, revisions to the Privacy
Rule, restoring the need to obtain written consent before use or
disclosure of information, except for certain purposes such as
filling a prescription.

AAPS has taken the position that the Bush revisions do
nothing except reduce some of the administrative nightmare
resulting from failure to distinguish disclosure from
physician use of lawfully disclosed information.
Moreover, the Clinton consent provision was meaningless in that
patients’ refusal to consent meant that physicians or facilities
could-or might have to-refuse treatment. The only answer, in
AAPS’s view, is to repeal HIPAA administrative

Oregon Plan Thrashed; but They’ll Be Back

Measure 23, with physician opposition led by AAPS, went down
to defeat by a margin of nearly 4:1-even though the Oregon
Medical Association did not even provide an argument against it
for the voters’ pamphlet. However, Mark Lindgren, Chair, Health
Care for All Oregonians, said that the campaign had surpassed his
personal goals: Even some opponents encouraged us to modify
Measure 23’s language and try again. He observed that many other
innovative public policies such as Medicare and Social Security
took years of debate.

AAPS Prevails on Pediatric Rule

In a high-profile case that reins in FDA authority (AAPS
et al. v U.S. FDA et al
., Civil Action 00-02898 (HHK)), the
federal district court for the District of Columbia overturned
the Pediatric Rule on October 17 (see AAPS News May 2002).

The Best Pharmaceuticals for Children Act (BPCA) and the
Pediatric Rule are incompatible, the court held. Congress adopted
an incentive scheme while the FDA adopted a command and control
scheme. Unlike the BPCA, the Pediatric Rule gives the FDA the
authority to refuse any new drug application if the manufacturer
does not conduct pediatric testing. Moreover, if the law (21
U.S.C. 355(d)) truly gave the FDA all the authority it claimed,
the door would be open to FDA’s regulation of all off-label uses,
based solely on the manufacturer’s knowledge that such uses are

The Pediatric Rule constituted a drastic change in the drug
approval process, stated Sam Kazman, general counsel for the
Competitive Enterprise Institute, a coplaintiff in the action.
FDA essentially claimed it could force new uses, or new patient
populations-in this case children-on a label…. The end result
could be a far riskier and costly approval process….

Congress may yet grant the FDA the statutory authority that
the court says it now lacks, in legislation sponsored by Senators
Kennedy and Clinton (see AAPS News Sept 2002). While proponents claim to be
concerned about children’s safety, the FDA has refused to release
data on harm done to healthy children in clinical trials,
according to Vera Hassner Sharav of the Alliance for Human
Research Protection.

Dr. and Mrs. Mitrione Sentenced to Prison

In a shocking decision handed down in Springfield, IL, on
October 31, U.S. District Judge Jeanne Scott sentenced
psychiatrist Robert Mitrione, M.D., to 23 months in prison, and
his wife, Marla DeVore, to 15 months-despite the fact that she
herself found that a star prosecution witness had given testimony
that was false to a dramatic degree, leading to dismissal of all
but two of the counts on which the pair had been convicted. As a
sanction for the false testimony, the Judge reduced the
prosecution’s estimate of loss to the government from $14,611 to

I believe greed and lack of judgment also entered into the
decision to bill Medicare and Medicaid, the Judge said.

This case is being watched closely by some in the medical
community, said prosecutor Patrick Hansen, in asking for the
maximum sentences of 27 and 21 months (State Journal-

The message that is received by those who follow the details
(AAPS News Jan, June, Oct 2002),
may be this: accepting Public Aid isn’t worth the risk. Even if
you can prove that you didn’t get a fair trial, it won’t help
very much.

An appeal is pending.

Supreme Court to Hear Forced Drugging Case

The U.S. Supreme Court has granted writ of certiorari in the
case of Charles (Tom) Sell, D.D.S., of Town and Country, MO, who
has been imprisoned for five years without trial (AAPS
Apr, Nov
). The government wants the right to forcibly drug him,
at its sole discretion as to type and dose of psychoactive drugs,
to render him fit to stand trial.

Though prison doctors say he needs drugs, Richard DeMier, a
clinical psychologist in Springfield, MO, wrote in a letter that
Dr. Sell passed a course and got a perfect score on a test to
determine whether he was mentally fit for trial.

The Sell case reflects a growing trend by federal
prosecutors to seize as much power as they can, stated AAPS
General Counsel Andrew Schlafly, who authored an amicus brief in
favor of granting cert (St. Louis Post-Dispatch

[The American Health Legal Foundation supported the amicus

Dr. McCarthy Pays $600,000 to Settle

After four years, $3 million in legal fees, and intense
pressure to plead guilty to one count of money laundering,
orthopedist Owen McCarthy, M.D., of Bradenton, FL, and his wife
Dottie agreed to a $600,000 civil settlement of a Medicare fraud
suit. Dr. McCarthy’s former associate, Dr. Craig Boulris, will
receive a reward of $84,000 for bringing the qui tam action.
Medicare will recoup about $225,000 in overpayments, which Mrs.
McCarthy said resulted from applying lessons she learned in
billing and coding seminars.

Besides upcoding, the complaint also alleged that Dr.
McCarthy employed unqualified physician assistants; Dr. McCarthy
calculated that he saved Medicare more than $50,000 in actual
payments by using assistants-who met all the criteria of the
American Academy of Orthopedic Surgeons (AAOS) -rather than co-

Dr. McCarthy states that Medicare actually defrauded him of
more than $608,000 by shifting Medicare payments to Medicaid
(which pays 40% less). AHCA, the agent for the Medicaid program
in Florida, settled a class action suit with 23,000 physicians
for $93,000,000. Dr. McCarthy will receive his share of $8,569.53
in three annual installments. In contrast to Dr. McCarthy’s case,
which was prominently covered for four years, this huge
settlement never got any press.

Mohammed Atta shared the same FBI agent, Dr. McCarthy
stated. Apparently, the agent was too preoccupied to check on
students at nearby flight schools.

In a letter to William Tipton, CEO of the AAOS, Dr. McCarthy
writes that the government’s favorite target is doctors who have
been in practice about 30 years and have saved up enough money to
make the potential take worthwhile. The government allows
prosecutors to encourage perjury and prevents doctors from
defending themselves. They have the resources to bankrupt anybody
in the medical profession.

Dr. McCarthy is not defeated. At age 66, he continues to
take ER call at three hospitals.

Where the Money Is

In FY 2003, the final year of HIPAA-mandated budget
increases for fraud-finding, an expenditure of $720 million is
expected to bring in $11 billion in overpayments and fines.

No one who accepts government money is safe. Remember: OIG
enforcement is alive and well and it takes into its sweep the big
and proud along with the small and pitiful (Alice Gosfield,
Medicare Compliance Alert 6/17/02).

AAPS Calendar

Jan. 31, 2003. Board of Directors, San Antonio, TX.

Feb. 1, 2003. San Antonio mtg with Bexar County Med

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

Note date change to avoid conflict with Rosh


Noncovered in New York. Our local Medicare carrier is
apparently trying to force all physicians to submit claims
electronically. With less than 30 days to go before the HIPAA
extension deadline, Upstate Medicare told us that Medicare will
no longer accept paper claims (with few exceptions) beginning
October 16, 2003. It didn’t say what the few exceptions are until
I asked. Then it said that electronic claims were required unless
the Secretary grants a waiver, and that the Secretary must grant
such a waiver if there is no method available for the submission
of claims in electronic form or if the entity submitting the
claim is a small provider of services or supplies. It left small
undefined [see p. 1].

I have worked very hard to maintain my status as a
noncovered entity. In New York, this isn’t easy. Public Health
Law 2807-E4F requires all physicians to file electronically
unless they submit fewer than 1,200 claims in a year, as we do.
We had to write to the Dept. of Health to obtain a waiver.

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

U.S. Brain Drain. Many of the most talented and
experienced physicians are declaring an emancipation date.
Topping the list of reasons is managed care. Others include the
degradation of the profession and liabilities such as HIPAA and
EMTALA. Whoever would have thought that an accidental coding
error could land you in jail while practicing good medicine!

At my daughter’s university, the careers counselor mentioned
how competitive engineering and business schools are. I asked
about pre-med. None of the really smart or talented kids go into
medicine any more, she informed me.

I’m afraid things will change only when truly influential
people can no longer get appropriate care.

Mark Baldree, M.D., Phoenix, AZ, from Round-Up

A Forecast. The U.S. seems to have a frenzied passion
for emulating the blunders of Great Britain. I assume that
government tax-paid medical care will be no exception. A great
many good doctors have left the British Isles, and people are
obliged to look to Indians, Palestinians, Jamaicans, and other
colonials for their medical care. Americans will have no place to
go, except outside the profession. Early retirement will be the
rule, and many will be locked into administrative jobs.

Charles Pavey, M.D., Columbus, OH, c. 1957

Reaping the Consequences. Much of Medicare was
originally designed by doctors and hospitals to feather their own
nests. Now the Medicare Frankenstein has turned on them with
price controls, onerous restrictions, and prosecutions.

Craig Cantoni, Scottsdale, AZ

Another Option. From a letter sent to all local
physicians with the AAPS FAQs: One does not have to put locks on
the filing cabinet or have some High School Graduate poking
around your office to find something wrong, as HIPAA suggests.
Just do not file electronically! There is a billing service in
the valley that will help you with the old paper method.

Tad Lonergan, M.D., Desert Hot Springs, CA

Noncovered or Bust! From a letter to CMS: I received a
form and your letter regarding HIPAA (Health Interference Plan
Absolutely Awful) and want to let you know that I only do hard
copy, not electronic transfer of information.

I was the first plastic surgeon in Naples and have taken
care of about 14,000 patients over 27 years, without a single
complaint from patients about a violation of their privacy. I am
basically a country doctor following in the footsteps of my
great-grandfather, who practiced in rural KY in the 1900s.

Companies trying to sell me HIPAA compliance programs are
coming out of the woodwork. Current Medicare payments barely
exceed overhead; Medicaid often doesn’t even do that. Forcing me
to comply with HIPAA would cost well over $10,000, even more over
time, which I am not prepared to pay. If forced to comply, I will
probably quit.

Christopher Mogelvang, M.D., Naples, FL

Single-Payer Overhead. Anyone who believes that
eliminating insurance companies will eliminate overhead is at
best too naive to have an opinion worth listening to. Advocates
may say that under single payer money goes to health care instead
of overhead. In fact, Wharton professor Patricia Danzon’s study
of the Canadian system suggests that its overhead is about 45% of
claims (Health Affairs, Spring 1992). Her estimate of
costs for U.S. private insurers, net of government cost shifting,
was 7.6% of claims.

Linda Gorman, Englewood, CO

The Hazard of Compromise. Politics is based on
compromise (relative values) rather than absolute values.
Compromise always leads to a lowering of standards because human
beings tend to take the path of least resistance. In VietNam,
troops on military patrol were told, Don’t walk the trail. But
since it was so much easier to walk the trail than to cut a new
one through dense jungle, troops took the trail-and got ambushed.

Donald Kreutzer, M.D., Clarksville, MO

Are Government Entitlements Civilized? The very idea
that we need government-provided medical care or retirement
proves how uncivilized we have become-we can’t trust people to
care of their own families, much less their neighbors.

Richard Relph, HealthBenefitsReform group

Legislative Alert

The Battle over Health Care
Choice Never Stops

Consider the implementation of the medical insurance tax
credits in the trade bill. When the House and Senate passed and
the President signed the Trade Adjustment Act, providing for tax
credits for displaced workers, most sane health policy analysts
saw this as a major policy victory, even though the number of
displaced workers affected would be small.

Well, forget it. Senate Finance Committee Chairman Max
Baucus (D-MT) sent an October 17 letter to Labor Secretary Elaine
Chao (he misspelled her name Chow for some reason, even though
she was confirmed by the Senate) warning her to be careful in
drafting the rules to implement those tax credits, especially in
the purchase of individual medical insurance policies.
Specifically, Baucus said that we-meaning the Congress-did
not intend
that individuals would be able to use a tax
credit in the trade bill to buy individual insurance through
State-based coverage options, such as insurance pools through
which individual medical insurers would be able to compete for
consumers’ dollars. In other words, if you think people will be
able to rely upon States to help them secure coverage as
individuals, you are mistaken, Lady! Instead, Baucus said that
the conferees agreed to a provision that would allow the purchase
of individual medical insurance if and only if the
individual had had individual coverage for one month
before losing his job. For those of you way out there in normal
America who think this is a stupid and pointless restriction on
the right of individuals to buy the plan of their choice, well,
you are starting to understand what the so-called national health
debate is all about.

The good news is that the House guys are not sleeping.
House Ways and Means Chairman Bill Thomas (R-CA), who was the
lead House conferee on the trade bill, sent Secretary Chao an
October 21 letter, making it clear that Senator Baucus has got it
all wrong. Thomas told Chao that the intent of the policy was
both clear and deliberately drafted in a way at variance with
Senator Baucus’s understanding.

Said Thomas: Specifically, Senator Baucus contends that the
conferees did not intend to allow states to enter into agreements
with individual insurers through state-based coverage options.
That is exactly what the conferees intended. Specifically, under
Section 35(e)(1)(f), the law allows individuals to use the credit
for coverage through an arrangement entered into by a state and
`a group health plan, an issuer of insurance, an administrator,
or an employer.’ The language is quite clear: states may contract
with insurers in the individual market to provide health coverage
for eligible individuals. In fact this language agreed to in
conference did not change from the amendment offered by Senator
Baucus-S. Amendment 3401-and passed by the Senate.

Once again: the debate is not about the money; it is not
about the number of people affected. It’s the structure, Stupid!

Question: Why stop the policy with those displaced by trade?
Why not extend tax credits for the purchase of private medical
plans to all of the unemployed? And then, why not just extend it
to all uninsured Americans and let them into the private market?
Recent research demonstrates the positive impact of tax credits
on affordability of insurance, especially for working people. For
example, University of Pennsylvania economists Mark Pauly and
Bradley Herring found that a 50% premium credit could reduce the
number of uninsured by as much as 52%. They also estimated that
with a fixed credit of about $1,000, the number of uninsured
would also drop by about 50%. Likewise, the President’s Council
for Economic Advisors found that for Preferred Provider
Organization (PPO) plans, the average annual premium for a young
male was $975 ($82 per month), and most of the uninsured are
young. The CEA concluded that for young single men nearly three-
quarters of the plans offer premiums less than the President’s
proposed $1,000 tax credit and over 90% of plans had premiums
less than $2,000.

Back to the Medicare Mess

The Bush Administration is worried about the impact of
the Medicare payment cuts, and fears that Congressional inaction
will cause serious access problems for Medicare patients.
Already, without factoring inflation into the analysis,
physicians are facing a pay reduction in Medicare of almost 18%
over the next three years. While the House of Representatives has
enacted a $30 billion package of Medicare reimbursement
increases, including increases for doctors, the Senate has not
been able to bring the Baucus-Grassley compromise package-with an
estimated $44 billion in provider reimbursements-to the Senate
floor before the Congressional recess. So, what’s new? The mess
in the formulas governing physicians reimbursement in Medicare is
symptomatic of the broader problem: a failure to change the way
Medicare operates.

Largely ignoring Medicare reform, House and Senate members
of both parties focused instead on adding poorly designed
prescription drug programs of unknown cost to an already
structurally flawed program. The political energy for this was
partially fueled by a political passion to seize the upper hand,
helped along by a vigorous campaign by the AARP, which said that
doctors should get no reimbursement increases unless and until
seniors got a meaningful drug benefit, which AARP lobbyists
defined as a benefit worth at least $750 billion over a ten-year
period. The AARP honchos sent stern messages to Congress that
their membership-the vast army of senior citizens they claim to
represent-would be very unhappy and would not understand it if
Congress somehow managed to pay Medicare doctors this year but
did not create a new $750-billion entitlement-their number-one
legislative priority for 2002-this year also.

They huffed and they puffed, but curiously, while the drug
issue will have played a role in the elections-to be decided as
this goes to press-it has not caught the fire that AARP
chieftains predicted and promised. Indeed, survey research shows
that it has been a surprisingly tepid issue on the campaign
trail, even colder than the patients’ bill of rights.

The President and Congress should start a multi-year process
of comprehensive Medicare reform based on patient choice and
control and market competition. In the process, they should
bypass the leftist screamers and focus on new retirees. There are
a number of steps that they can take to get this process moving
in the next Congress.

First, they could allow new retirees to take their current
private medical plans into retirement with them as their primary
coverage, and get a government contribution, in the form of
premium support, to offset the cost of that coverage. New
retirees, when they turn 65, could make a choice as to whether
they wish to enroll in the old Medicare program, or continue with
their private plan. This would create a seamless continuity of
coverage and care for retirees.

Second, they could join a prescription drug security card to
a prescription drug account and target the subsidies to low-
income seniors who do not have access to drug coverage through
retirement or supplemental coverage. This could be done by giving
these seniors a prescription debit card plugged into a federally
subsidized prescription drug account. With an initial deposit of
funds between $600 and $800 per year for low-income retirees, the
account could be rolled over tax free from year to year, with a
catastrophic provision for high drug costs. Higher-income
Medicare patients and their spouses could also contribute funds
into the new account tax free, and it would thus function like a
medical savings account. The idea has been proposed by Grace
Marie Turner of the Galen Institute and Dr. Joseph Antos, a
former Assistant Director of the Congressional Budget Office, now
with the American Enterprise Institute.

Finally, they could encourage new retirees take advantage of
the new health reimbursement arrangement that was approved by the
Treasury Department last June. New Medicare beneficiaries should
be able to take balances accumulated in Health Reimbursement
Arrangements, Flexible Spending Accounts, and Medical Savings
Accounts with them into retirement, maintain them as tax-free
accounts with their own and employer contributions, paying for
their care directly from these accounts without Medicare payment
or regulatory restrictions. With such accounts, new Medicare
patients could maintain the direct relationship with doctors they
enjoyed during their working life.

Breakthrough for Health Care Choice in Maryland?

Of all places! On Halloween, Maryland House Speaker Casper
R. Taylor, the most prominent Democrat in one of the most
Democratic States, unveiled a comprehensive reform proposal. But
unlike most of the legislation that normally is proposed in the
Maryland, this one will set policy in a very different direction
and have a distinctly bipartisan complexion.

In a major speech to business leaders in Cumberland,
Maryland, sponsored by the Maryland Business for Responsive
Government, a prominent business group, Taylor outlined the major
components of a reform proposal that would include the use of
Medicaid funds for private insurance, the use of tax credits for
the purchase of individual coverage, a reform of the individual
medical insurance market that would include the elimination of
state benefit mandates on individual policies, a reinsurance
mechanism to cope with plans burdened by adverse selection, and
tax incentives and penalties governing the purchase of individual
and group policies to discourage free riders who end up on public

The Taylor proposal does not, of course, represent the
conservative or libertarian ideal; far from it. But what is
positively stunning is that it represents a significant change in
the nature of the Maryland debate, a big break from the standard,
almost rote, reliance on public program expansions, restrictions
on patient choice, and increased regulation.

The Taylor proposal is not yet in legislative language, and
it could improve. Key elements of the proposal are as follows:

Mainstreaming adult Medicaid enrollees into the
private insurance market
. Medicaid eligibility would
increase from 46% of poverty ($4,000 per year) to 150% ($13,200
per year) in tandem with the Bush Administration HIFA waiver to
use private-sector coverage for Medicaid-eligible adults. While
Maryland liberals will like the Medicaid eligibility expansion,
conservatives will like the privatization of the coverage.

The establishment of tax credits and tax penalties to
discourage free riders.
A sliding-scale refundable state
tax credit would be created for adults between 150% and 250% of
poverty-and a flat credit for persons above 250% of poverty.
Upper-income individuals, at 300% of poverty ($26,580) and above,
would lose their personal exemption on the state income tax if
they refused to purchase medical insurance.

Reform of the medical insurance market. A
voluntary choice cooperative, or purchasing pool, would be set up
for individuals and families. For individual plans, Maryland’s
large number of state-mandated benefits would be eliminated,
allowing the purchase of a basic health insurance package.
Conservatives and libertarians likely won’t be happy with
modified community rating and guaranteed issue in the individual
market. But they are likely to back his proposed reinsurance pool
to cope with the problem of adverse selection. It is far less
regulatory than the standard risk-adjustment mechanisms that are
routinely promoted by reformers.

The role of employers as a clearinghouse for personal
choice of health plans
Employers would not be required
to subsidize health insurance for employees, but they would serve
as a clearinghouse for employees in the voluntary choice
cooperative. As Taylor told the Maryland Business for Responsive
Government conference in Cumberland, Maryland, If we can make it
easy for an employer, even for an employer that is not able to
offer insurance to their employees on his or her own, to offer
employees a choice of health plans through the purchasing
clearinghouse, we can dramatically expand the number of people in
this state with insurance without costing businesses much more
than the time to hand out some health insurance information to
new employees and repeat that process once a year thereafter. In
effect, the Taylor proposal would function more like the federal
employees program.

Maryland has, arguably, the most highly regulated medical
sector in the nation. It leads the nation in mandates-58 at last
count. The Taylor proposal does not resolve all of that. It is,
however, still a work in progress, and the fundamental direction
of the policy changes is sound.

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

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