AAPS News – Dec 2005


Volume 61, No. 12 December 2005


“Payment for Performance” or “P4P” has acquired the aura of
like-it-or-not inevitability, like other central planning
fiascos such as DRGs and the RBRVS that preceded it. On cue,
organized medicine is figuring out how to profit from doing it to
ourselves before somebody else does.

Research so far has shown little or no return in increased
quality on the investment in P4P. For example, the main result
of P4P using rates of cervical cancer screening, mammography, and
hemoglobin A testing would be to reward those with
higher performance at baseline (Rosenthal MB et al.,
JAMA 2005;294:1788-1793). Yet despite the lack of
demonstrated value, “almost every physician and hospital in the
United States is now a potential participant in some form of
[P4P] program” (Dudley RA, JAMA 2005;294:1821-1823.)

The Medicare Modernization Act of 2003, which also created
the prescription drug benefit, gave CMS the authority to
experiment. In the Premier Hospital Quality Incentive (PHQI)
project, which involves the management of five chronic
conditions, tentative results from 270 hospitals showed an
increase in “composite quality score” from 79 to 86%. This
measures, explains Richard Dolinar, M.D., “the percentage of the
time that hospitals followed treatment instructions in pursuit of
a bonus” (Heritage Backgrounder 1882, 10/5/05).

Of the 34 PHQI indicators, 27 are process measurements. As
David Eddy of Kaiser Permanente acknowledges, “a process measure,
by its very nature, micromanages.” And outcomes measures, such as
mortality, can be incentives to game the system say by avoiding
the sickest patients.

If doctors focus on meeting artificial targets, the
unmeasured patient outcomes will almost certainly
worsen as British experience suggests (AAPS News, Oct 2003, 2004).

But Medicare is very sick, and Congress and CMS must
prescribe. Senators Grassley and Baucus have introduced the
Medicare Value Purchasing Act (MVP), S. 1356, creating Part E of
Medicare. Meanwhile, CMS Administrator Mark McClellan seems
determined to push P4P along, using his regulatory prerogatives.
He speculated that within 10 years, P4P-based compensation could
comprise up to 30% of the government’s payments to providers.

As Medicare price controls are tightened, physicians may buy
into P4P in an attempt to maintain their incomes. Private payers
will surely follow Medicare’s lead, compounding its effects.
Income will be redistributed, writes Dr. Dolinar, to “providers
who most successfully subordinate their judgment and creativity
to the mandated protocols.”

The alternative to paying for performance (i.e. for
compliance) is payment for value. And value, by inexorable laws
of economics, will be determined by the payer. P4P, in fact,
serves the values and priorities of CMS and insurers very well.
As Keith Syrett of the University of Bristol observed, “decision
making by guideline offer[s] a means of scientifically depoliti-

cizing the rationing debate.”

The values of patients, of course, concern optimizing their
own clinical outcomes, according to their own priorities. For
both patients and physicians, P4P programs are a “lose/lose”
proposition, with benefits accruing only to payers.

While P4P claims to be founded on “evidence-based medicine”
(EBM), for which randomized controlled trials (RCTs) are the gold
standard, RCTs cover only a few conditions and procedures, and
for a limited length of time. “Guideline authors nearly always
extrapolate to groups that were not adequately represented in the
trials,” states Dr. Alan M. Garber of Stanford University’s
School of Medicine.

Why check for microalbuminuria in a patient who is already
on an ACE inhibitor, asks Dr. Dolinar. Or do an eye examination
in a patient who is blind? Or a Pap smear in an older woman at
extremely low risk for cervical cancer?

In her talk entitled “EBM: Perverting Science in a Quest for
Control” at the 2005 AAPS annual meeting, Linda Gorman noted:
“EBM offers a rationale for centralized decisions, … with the
stated goal of ending practice variations, thereby promoting the
signal virtue of equality.” It routinely confuses statistics with
science and glosses over statistical limitations. By the time a
guideline is written, it may already be outdated.

Even some in the new $1 billion “disease management” (DM)
industry acknowledge that customized approaches work better than
“one size fits all” (HealthLeaders News 10/31/05).

But who will have time to customize while trying to adhere
to a 400-page “P4P Prep Guide”?

Science fiction conceivably could happen; science fantasy is
impossible. Isaac Asimov and Harlan Ellison once pointed out this
distinction, recalls Gerry Smedinghoff. The faster-than-light
(FTL) drive makes many of their stories a fantasy.

Patients who want medical care that respects their
values and their priorities will have to confront
economic reality as they move to “consumer-directed” care.

P4P is like the FTL drive: it’s a useful device for spinning
plots or central plans, but it can’t make economic fictions work.
These must be dispelled to restore payment for value.

Current retail prices in medicine are fiction. And too much
about American medicine is opaque or secret, including the facts
about cost-shifting, “provider” incentives, adverse effects of
treatment, and hidden social-engineering agendas.

As actuary Gerry Smedinghoff notes, reduced transparency
leads to bad measurement, which leads to bad contracts, which
lead to moral hazard and bad behavior, which leads to regulation,
which leads to still more opacity [plus higher costs].

Prices are the indispensable measure of value. Patients and
physicians must be allowed to agree on an honest price for a
freely chosen service. P4P is a reality-denying fantasy.

Value-Conscious Consumers

A June 2005 study on consumer-directed health plans by V.
Agrawal et al. for McKinsey & Company shows that in comparison
with “traditionally” insured consumers, CDHC subscribers were at
least 50% more likely to ask about cost; 33% more likely to
independently identify treatment alternatives; three times more
likely to choose a less extensive, less expensive treatment; and
25% more likely to engage in healthy behaviors. They were twice
as likely to forgo treatment for conditions they considered
nuisances, but no more likely to forego treatment for serious
conditions. They were at least as likely to receive preventive
care and had a “longer-term mind set” in making medical
decisions. They were 20% more likely to say that they carefully
followed treatment regimens. Most were not satisfied with the
provider information available to them; 80% wanted more
information on prices.

Are consumers willing to pay for quality? Based on a
nationwide survey of 2,028 insured persons, 14% said they were
very willing to see a doctor who didn’t take their insurance; 39%
were somewhat willing; 26% were not very willing; and 21% were
not at all willing (Harris Interactive, Wall Street Journal

Doctors on Quality and Payment for Value

“We all have to learn to prioritize our own resources toward
what we believe may be important to us…and accept the
consequences. The game plan of `liberals’ is to brainwash people
into believing that government has the right to force us [to
place a higher priority on the goals of others].”

Milton Kamsler, M.D., St. Augustine, FL

“HEDIS scores attempt to measure quality by counting the
number of Pap smears and blood pressure checks patients received.
That’s not my definition of quality, which is closer to how
patients are treated when they are actually sick.”

Herbert Rubin, M.D., Los Angeles, CA

“Wouldn’t eliminating third parties be the ultimate `pay for
performance’? Let the consumer be the ultimate judge of
both pay and performance.”

Timothy Kriss, M.D., Versailles, KY

Why Socialists Hate HSAs

“The principle of insured services is `use it or lose it’…
[But the HSA] `use it or save it’ principle increases enrollees’
responsibilities for costs incurred in their own care but
decreases their responsibility for costs incurred in the care of
strangers. HSAs thus shift the locus of rights and
responsibilities…from governments and employers toward

“More broadly, the HSA is part of a vision that would
increase authority for the individual in all aspects of

“Most industrialized countries assign the responsibility for
setting health care priorities to government, which uses price
controls and capacity limits to restrain expenditures.”

Managed-care companies lack the “social legitimacy to
perform ethically and emotionally charged tasks.” Unlike others,
apparently, Americans are also skeptical of government. The
success of HSAs would jeopardize efforts to force Americans to
subjugate their personal values to collectivist goals. See
Robinson JC, N Engl J Med 2005:352:1199-1202.

Retainer-Based Practice Thrives in New

Desiring to get back to old-fashioned independent practice,
Michael J. Stein, M.D., of New Hampshire opened the only
retainer-based family practice in New England last January. For a
quarterly retainer, he offers housecalls, blood work, and
unlimited office visits. He has hospital privileges, assists at
surgeries, and does minor surgical procedures, often averting
expensive ER visits. While offering 24/7 availability, he reports
that patients are highly respectful of his time.

Although he is opted out of Medicare, his elderly patients
are the most appreciative. “They toss their supplemental
insurance and instead create medical savings account CDs to cover
what little exposure they have.”

“Doctors trap themselves by signing contracts with third
parties,” he writes. “If they wouldn’t do this, we wouldn’t have
a problem. Then the arrangement would be purely between the
subscriber and the insurer.” He notes that the savings from the
widespread use of his model would be “extraordinary.”

Dr. Stein now has more than 220 patients, and plans to cap
his practice at 600. His website is www.realdoc.net.

Doctors Support Medicare Cuts

“I do not share the desire to be slowly cooked like a frog.
I want the heat to come up fast so we will jump out before we all
die in a state of conscious sedation…. I am encouraging my
Representative and Senators to allow the cuts to go ahead.”

Thomas LaGrelius, M.D., Torrance, CA

“Unlike many of my colleagues, I realize that the Medicare
program is unsustainable and is robbing today’s workers of their
future in an effort to pay for the retirement of others. I am
also quite aware that as…physicians leave it in droves, our
elected leaders will attempt to force us to provide
charity care to the elderly and poor. This fight is
inevitable…. The sooner physicians reject government medicine,
the sooner politicians will show just how little freedom means,
when there are angry seniors to placate.”

Patrick Conrad, M.D., Niceville, FL

AAPS Calendar

Nov 18, 2005. Illini program at Northwestern Univ.,
Chicago, featuring debate between Drs. Quentin Young of PNHP and
Jane Orient of AAPS. Call (800) 635-1196 for details.

Feb 11, 2006. Board of Directors meeting, Houston, TX.

Sept 13-16, 2006. 63rd annual meeting, Phoenix, AZ.

“Unlike the old Lockean rights, [the new rights] are not
limitations on government, but just the opposite: authorizations
for new areas of government control.”

Joseph Sobran

Pennsylvania Courts Hold for Blue Cross

The Court of Common Pleas for Chester County (PA) granted
summary judgment in favor of Independence Blue Cross, which had
denied alcoholism treatment to the late Sandra Lobb, despite her
family’s desire to pay for it (see AAPS News, November 2005). The Superior Court affirmed in a
non-precedential decision (Johnson v. Independence Blue
, No. 1310 EDA 2004), although dissenting justice
McEwen wrote that there were “substantial issues of disputed
material fact, which…may only be resolved by a jury.”

Family members, the Court said, did not prove that they had
offered payment and been refused. The patient’s daughter, for
example, could not recall exactly which facilities she had called
from a listing in the phone book, or exactly why they had refused
to accept her mother.

In the federal case, attorney Lawrence Otter writes, in a
memorandum of law opposing IBC’s motion to dismiss:

IBC’s Motion…is a blatant attempt to mislead the
court…. IBC is creating its own set of facts to
extract itself from the contradictory position it finds
itself in because of admissions before the Pennsylvania
Commonwealth Court and the Pennsylvania
legislature namely that IBC and not the plaintiff’s
physician has the final say on what is
“medically” appropriate compared with the sworn
testimony of its Medical Director that “We do not make
medical decisions….”

Otter states that “the mendacity and audacity of IBC is
beyond comprehension.” He notes that “finding your personal
physician has an overriding contractual relationship with your
insurance carrier is like discovering your attorney is under
contract to the opposing party.”

The injury to the plaintiff’s right to contract is felt by
all Pennsylvania citizens with IBC insurance, Otter writes.

Court documents and Otter’s statement to the Health and
Human Services Committee of the Pennsylvania House of
Representatives is posted in the Hall of Shame under “Bad
Insurance Contracts.”

Danger in Medical Staff Applications

Horty Springer, the nation’s top hospital law firm, which
holds seminars at luxury resorts to teach hospital administrators
how to destroy physicians, has developed some shocking fine print
that you might discover in your medical staff application:

To the fullest extent permitted by law, I
extend absolute immunity to, release from any and all
liability, and agree not to sue the hospital, its
medical staff, their authorized representatives, and
appropriate third parties for any matter relating to
appointment, reappointment, clinical privileges, or my
qualifications for the same.

The demand for absolute immunity includes: ” any actions,
recommendations, reports, statements, communications, or
disclosures involving me, which are made, taken, or received by
the hospital, the medical staff, their authorized
representatives, or appropriate third parties.” It applies even
if the application for staff privileges is rejected!

Absolute immunity is unheard of in most applications of the
law, and physicians should object to its inclusion in their
contracts. Members should immediately call the AAPS Limited Legal
Consultation Service for advice.

Court Decides Against Privacy Rule Challenge

On Nov 1, after 9 months of deliberation, the U.S. Court of
Appeals for the Third Circuit ruled against the plaintiff in
Citizens for Health v. Leavitt, No. 04-2550.

According to an analysis by Jim Pyles, attorney for the
plaintiffs, the Court agreed that plaintiffs had suffered an
“injury in fact” to their medical privacy and that this injury is
“causally connected and traceable” to the Amended Privacy Rule.
The fact that this is happening under the “federal seal of
approval” is “regrettable and disquieting.”

The Court acknowledges that the Amended Rule grants
“regulatory permission” for covered entities and their business
associates to disclose identifiable health information without
patients’ consent and against their will.

Nevertheless, the Court refuses to consider the plaintiffs’
Constitutional claims because the Rule did not “enhance the
power” of covered entities to disclose medical information.
“[T]here is no evidence that the nonconsensual uses and
disclosures permitted by the Amended Rule were prohibited [under
federal law] before the Rule went into effect.”

The principle announced in this decision, Pyles states,
“would permit the government to infringe any right that
individuals would otherwise expect to have if the government
merely `codifies’ the private conduct in a governmental law.”

AAPS has warned of the danger of the public-private
partnership as a means of “outsourcing” violations of fundamental
rights. It was a strategy implicitly discussed in the “Zelman
memorandum” in the Clinton Task Force documents to enable the
government to effectively forbid private spending for necessary
medical services. (See the IBC case above, and www.aapsonline.org/judicial/zelman.

The decision and the AAPS amicus brief are posted at www.aapsonline.org/confiden/cvt.htm
. The amicus brief was funded by the American Health
Legal Foundation.

Prescribing Habits Scrutinized Under Part D

CMS’s new Part D integrity contractors may follow the lead
of Medicaid Fraud Control Units in analyzing physician
prescribing patterns, seeking evidence of overutilization,
kickbacks, or unnecessary or inappropriate prescriptions.

If a physician starts ordering more expensive medications
because Medicare will now pay for them, the enforcers may suspect
a kickback. Payment to “research” off-label uses may also be
considered a kickback. Physicians need to try (and document)
other therapies first, or a prescription for a drug may be deemed

Investigations of physicians who order more controlled
substances than others are also expected to increase once Part D
goes into effect (MCA 10/31/05).

CMS will be using data-mining technology. But industry
leaders doubt that CMS will be able to stop Part D fraud because
of the program’s dizzying complexity (MCA 10/7/05).

HIPAA “Oversight” Justifies Intrusive Search

In invading the office of Dr. Young Moon of TN, the HHS OIG
claims that its “oversight” function under HIPAA permits
warrantless searching; videotaping exam rooms and bathrooms;
intruding into a patient treatment; and copying all records, even
of patients not covered by federal programs (AM News
8/8/05). Dr. Moon’s trial is set for Nov. 29.


Pre-1890 Fees. Before the 1890 passage of the Sherman
Anti-Trust Act, most physician fees were set by the county
medical society. Unlike with current Medicare fees, the 1871 “Fee
Bill” published by the Eric County Medical Society included a fee
for “rising at night and prescribing” and a “traveling fee.” For
services rendered between 10 p.m. and 7 a.m., fees were doubled.
While no one is arguing for price-setting by anyone, it is
notable that since the inception of Medicare, most physicians
have fully embraced that which their elder colleagues considered
to be dishonorable especially providing heavily discounted or
nearly free care under the auspices of “public authorities.”
Discussing fees with patients ahead of time, and expecting
payment at time of service, now considered unseemly by
socialists, were expected, honorable behavior in 1871. Now
prosecuted as fraud, charitable discounts to persons of modest
means were strongly encouraged except when patients brought on
their condition by immoral behavior (i.e. in cases of venereal
disease). Whatever one thinks of treatments given in 1871,
physicians then understood the importance of honor and personal

Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY

Financial Incentives Matter. A comparison of in-
hospital complications in managed-care and fee-for-service
patients in Sacramento and San Diego in 1995 and 1996 showed
“significantly worse outcomes for HMO patients, particularly
major surgery patients.” Managed-care patients were about 15%
more likely to have a complication conditional on observable
patient characteristics. The authors concluded that “any positive
effects of preventive care incentives created by managed care are
more than outweighed by accompanying corner-cutting incentives.”
See: Haile PA, Stein RM. J Economics and Management

Linda Gorman, Independence Institue, Englewood, CO

Who Needs Protection Against High Prices? Why don’t we
need protection against grocery stores? Gas stations? Auto
dealers? Because the free market works. If someone overcharges,
people go elsewhere. How is medicine different? Are doctors
basically dishonest? Or has the mob invaded the practice of
medicine? Medical care has moved far away from the free market,
and prices have become so distorted that people believe they need
“protection,” as through things like PPOs. They pay high
premiums, physicians get less, and the CEO of UnitedHealth Care
made $124 million last year. But many of us have escaped the
third-party trap. We make our fees known and do not overcharge
one group to compensate for low government or managed-care fees,
or to pay myriads of workers to fill out forms. Patient power and
price transparency are what is needed to break the stranglehold
of mob-like tactics, including those of Medicare.

Alieta Eck, M.D., Somerset, NJ

Doctors Will See Cash Patients. It may well be that 98%
of doctors don’t mind being lackeys on the government payroll.
But I find that when a patient looks a doctor in the eye and
says, “Read my lips, I’m a cash patient,” the doctor usually
accommodates. He may cock his head like the RCA dog at first, but
eventually he does get it. It’s frustrating that doctors don’t
have neon signs in their reception room: “HSAs Happily Accepted,”
or “Best Rates for Cash Payment.” Why not have mass shreddings of
HMO/PPO contracts?

Frank Timmins, HealthBenefitsReform Group

Price Transparency. My fees are published on two large
billboards, on a sign in front of my office, in my waiting room,
and on the internet (www.cashdoctor.com).
I charge everyone the same. For someone who is truly down on his
luck, I will discount my already discounted fees; charity is more
effective above the AGI line than below it. I do not “reprice” to
keep the business of someone who doesn’t mind waiting three hours
in the ER because my quoted fee of $135 to suture his laceration
is more than the copayment on his insurance.

Robert S. Berry, M.D., Greeneville, TN

The “By the Way” Game. I have treated some cash-paying
patients for some time, up to a year, who suddenly announce that
they had Medicaid or out-of-state worker’s compensation all
along. I am told that no states have reciprocity with other
states’ comp claims. California can enforce its comp rules
against me only if I agree in writing. Medicaid, however, has
“look-back” rules, so since I am in Medicaid for established
patients, I have to refund any money the patient has paid. For
new uninsured patients, we now check names against the Medicaid
eligibility list. Once in a while, we have to cancel an
appointment with a patient who has lied to us, planning to recoup
payments with the “by the way” ploy.

Russell W. Faria, D.O., Newport, OR

P4P Is a Lie. P4P means creating bureaucratic hassles
to hobble care. It is absurd to think that the old-fashioned
competitive evidence-based medicine we learned is inferior to
government-sanctioned one-size-fits-all “EBM.” The only reason
for organized medicine to “sit at the table” to develop EBM and
P4P is to teach government how to destroy the medical profession:
Government contracts are more profitable than member dues.
Nonparticipation remains the only answer.

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

Legislative Alert

A Last Effort at Medicare Drug

In direct defiance of the Congressional leadership and the
White House, Sen. John McCain (R-AZ) and six other Senate
Republicans have proposed major legislation to cut federal
spending, including a provision to delay the Medicare
prescription drug benefit by two full years. This would give
Congress time to reconsider and redesign a rational and
responsible benefit that is affordable for both seniors and
taxpayers. A simple delay could produce big savings, between
$40 to $80 billion.

The McCain proposal would also retain the Medicare Drug
Discount Card, an ATM like card to be used for the purchase of
prescription drugs, and would increase the annual subsidy for
low-income seniors from $600 to $1,200 per year. Almost seven
million seniors are enrolled in this program.
Despite its
indisputable success is giving seniors ample savings in a
competitive market, Congress and the Administration have agreed,
under current law, to shut it down on January 1, 2006, whether
seniors like it or not.

Finally, McCain’s proposal would accelerate the means
testing for Medicare Part B. Taxpayers now pay 75% of premiums,
and beneficiaries pay only 25%. Under the Medicare Modernization
Act of 2003, premiums would increase for higher-income seniors
(income more than $80,000 per year for individuals or $160,000
per year per couple), beginning in 2007. Starting the increase
in 2006 would save $6 to $9 billion.

These Medicare proposals are part of a general package that
includes a reduction in discretionary spending; a freeze on cost-
of-living adjustments for members of Congress and federal
employees; and rescission of the spending in the notorious $286
billion Highway Bill, particularly the pork projects that have
outraged so many Americans, such as the notorious “Bridge to
Nowhere” in Alaska. As the Senator and his colleagues have
pointed out, federal spending has grown twice as fast under
President Bush as it did under President Clinton. Since 2001,
federal spending has increased 33% percent, with 55% being in the
area of social programs.
Thus far, the federal government has
increased spending by another $71 billion to pay for Katrina
relief. Congress has not yet enacted any offsets to pay for that
additional spending.

Short of a Home Run: The Tax Reform Commission

On Nov 1, the President’s Tax Reform Commission, chaired
by former Senators John Breaux (D-LA) and Connie Mack (R-FL),
issued its long-awaited report on tax policy recommendations. The
Commission members had the opportunity to make history and
dramatically improve the lives of millions of Americans. Tax
reform deserves something a lot bolder than the “business as
usual” approach that so often prevails inside the Beltway.

The Commission did not entirely strike out. On balance, its
recommendations would be beneficial, especially with regard to
the tax treatment of health insurance, which has remained largely
unchanged since World War II.

The Current System

As readers of this column know, American citizens can
get unlimited tax relief for the purchase of health insurance if
and only if they get that insurance through the workplace. The
value of this form of compensation is excluded from taxable
income. While employees get a “tax exclusion” from both income
and Social Security taxes, employers deduct the insurance
premiums as a business expense, just like wages.

This is big money: the value of federal tax breaks for
health insurance amounts to roughly $189 billion. Combined
federal and state tax breaks came to almost $211 billion in
This policy ties access to health insurance to the

During the postwar period, when most Americans worked at the
same job for all or a large part of their working life, this
arrangement enabled millions of Americans to have access to
affordable group health insurance, not only while working, but
also in retirement.

But times have changed. This is not your father’s economy.
As Labor Department statistics show, a worker today has
changed jobs 10 times before the age of 38
. A change or loss
of employment doesn’t automatically mean the loss of auto,
homeowner’s, or life insurance just health insurance. The
employer owns the policy, and there is no true portability.
Unless classified as self-employed, Americans have to buy their
own insurance with after-tax dollars, adding as much as 40% to
the cost. Not surprisingly, the uninsured are often low-income
working people, especially those between jobs.

There are a host of other problems with the current tax
treatment. It masks the true cost of medical care, fuels higher
costs, and is dramatically regressive, with tax benefits going
primarily to upper-income households.

The Tax Reform Commission should have recommended a
wholesale reform, as proposed by the American Enterprise
Institute, the Heritage Foundation, the National Center for
Policy Analysis, plus literally hundreds, if not thousands of
analysts and economists, who have long favored complete abolition
of this current tax treatment of health insurance for well-
established reasons.

One option would have been to replace the current tax breaks
for health insurance with a universal health-care tax credit.
Persons with lower income or higher medical costs could receive
subsidies to help them afford coverage. In any case, all
Americans, regardless of how they purchased medical coverage,
would get direct and immediate tax relief or assistance. This
would be fair, equitable, and efficient. Americans could own
their own health policies, just like they own other insurance
policies, and take them from job to job.

The Commission Recommendation

Instead of removing the exclusion for health benefits
entirely, the Commission decided to simply cap it at $11,500
for family insurance coverage and $5,000 for single coverage.

The proposal would index the cap to inflation, as measured by the
consumer price index.

The proposed tax cap is likely to meet a series of

First, wouldn’t a tax cap on the value of the exclusion
erode health insurance coverage and actually increase the number
of the uninsured? Not necessarily. The available revenues could
be used to finance refundable tax credits and make insurance more
widely available to those who do not get it through the
workplace. The evidence is overwhelming that there is a direct
correlation between job status and access to health insurance,
and this would liberalize access to coverage, not constrain it.
The broader the coverage, the less cost shifting; the less cost
shifting, the better for premiums.

Second, wouldn’t a tax cap increase the real cost of medical
care and introduce new levels of complexity? No. Lowering the
value of the health benefit to the capped amount would not be a
bad thing. It should slow the growth in health insurance
spending, especially where it is highest. The data show that the
biggest tax breaks for health insurance go to upper-income
employees in large firms. Not surprisingly, firms (e.g.
Detroit’s auto industry) have made extravagant promises,
particularly to retirees, that they cannot keep, or have no
intention of keeping
. They are now whining that they need to
have the taxpayer bail them out directly. It would be better to
dampen the extravagance up front.

Would not a tax cap on the exclusion for health benefits
introduce new administrative problems for employers and
employees? The point is well taken. But, it does not have to be
that way. It depends on how employers respond. If employers say,
fine, we will pay $11,500 in tax-free money, and no more, that is
likely to have a positive structural impact on the health
insurance market. It could result in the system
becoming administratively simpler. The reason: it is likely to
accelerate the movement toward a defined-contribution system in
health care, rather than the defined-benefit system that we have

A movement toward defined contribution would have several
positive consequences.
It would encourage carriers to design
affordable plans that meet the cap. Those who wanted a more
expensive plan could have it but would have to pay the balance in
after-tax dollars. Defined contribution would create a greater
incentive for insurers to offer catastrophic policies (the
purpose of health insurance in the first place), encourage big
deposits into health accounts, and establish greater
predictability for employees as well as employers.

Another big benefit to moving toward defined contributions
would be to encourage competing plans to become the direct agents
of the true principals of health insurance the employees, not
the employer. This would mean that insurers would have a
direct incentive to provide service to the employees and their
families with a minimum of hassle
; otherwise, they would and
should lose business. This would, of course, discourage these
carriers from engaging in the intensive,
counterproductive micromanagement that frustrates doctors and
patients and drives up administrative costs.

What Next?

Congress will have to ponder these recommendations, and
accept, reject, or modify them. If the proposed cap on the tax
exclusion is accepted, the crucial policy question is what to do
with the new revenues. With households now paying roughly 40%
of their income in taxes of all kinds
, any new revenues
should go directly back to the citizens. The Commission says that
it should replace revenues generated from other taxes, such as
the alternative minimum tax (AMT). Another option would be to
provide individual medical tax credits or vouchers for those who
can’t afford health insurance. This would reduce the number of
America’s uninsured. In either case, expanding health care
coverage through the private sector will reduce the taxpayers’
big bills for uncompensated care. Everyone wins.

The Medicaid Commission

Yet another commission is trying to figure out what to
do with Medicaid: the nation’s largest health program, with 53
million enrollees and an annual budget now of roughly $300
. It provides care for millions of children, their
parents, pregnant women, disabled, elderly, and in some cases
even childless adults, plus long-term care services to Americans
who previously have been middle class. Such a diverse group of
very different enrollees makes the redesign of the program

Both federal and state governments are struggling with
Medicaid costs. Unlike the federal government, most states must
maintain a balanced budget, and Medicaid obligations are
squeezing out other priorities. For the first time, National
Governors Association says, Medicaid has surpassed education as
the largest part of state budgets. The biggest cost driver,
which takes roughly 70 cents out of every Medicaid dollar, is
long-term and custodial care.

The growth of middle-class entitlements threatens to shred
the safety net for the poor. Politically, as everybody now knows,
it is much easier to cut Medicaid than Medicare. Reimbursements
for doctors and other health professionals are lower in Medicaid
than in Medicare. And within Medicaid, to the extent that it
continues to pick up the long-term care costs of an ever larger
number of middle-class families, it too will be a less viable
program for the poor and the truly indigent. Those who truly
care about the poor can’t agitate for lavish middle-class
entitlement expansions.
There’s no money.

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

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