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Volume 60, No. 2 February 2004
FREE-MARKET CRISIS AND
OPPORTUNITY
“Once millions of HSAs are established, it will be almost
impossible to reverse this program,” writes Physicians for a
National Health Program (PNHP) on its web site (
www.pnhp. org); thus, it
calls for an immediate repeal of the Health Savings Accounts
enabled in the Medicare Prescription Drug, Improvement and
Modernization Act.
Editorialists called HSAs “Teddy’s nightmare” (Wall St
J 12/23/03) because a reinvigorated private medical
insurance market could end the dream of Senators Kennedy,
Clinton, et al. for Canadian-style socialized medicine.
Aetna, Fortis, and other insurers are writing policies, and
the IRS has issued Notice 2004-2, available at
http://www.irs.gov/pub/irs-drop/n-04-2.pdf. About 30% of
employers are expected to start offering such plans, according to
Helen Darling of the Washington Business Group on Health.
To be eligible, a person must have a qualifying high-
deductible health plan (HDHP) and may not have coverage
(even as a spouse or dependent) under a plan that is not
an HDHP. An HDHP has an annual deductible of at least $1,000 and
maximum annual out-of-pocket expenses of $5,000 for an individual
or $2,000 and $10,000, respectively, for a family.
HSA trustees or custodians are not required by the IRS to
determine whether an HSA distribution is used for qualified
medical expenses. Individuals need to keep such records in the
event of a tax audit. There is a 10% penalty on top of taxes for
using the funds for non-qualified purposes, except after a
beneficiary’s death, disability, or attainment of age 65.
As PNHP points out, the tax advantages are not great,
especially for those who don’t pay taxes. The tax benefit ranges
from $200 for a person with an adjusted gross income of $35,000
to $721 for a person with an AGI of $500,000 or greater (Wall
St J, op. cit.) It’s the insurance premium saving that is,
over time, supposed to fund the deductible.
Many will probably choose, as PNHP fears, to use their HSA
as a form of individual retirement account (IRA). If a head of
household contributes 100% of a $4,000 deductible each year
starting at age 30, and withdraws $1,000 per year to pay medical
expenses, a nestegg of $284,509 would accumulate in 35 years,
assuming a 5% rate of return, according to a chart distributed by
the Archer MSA Coalition.
This individual benefit, PNHP laments, would come at the
expense of “fragmenting the health care risk pool.” If healthier
subscribers withdraw from “comprehensive” plans, the cost of such
coverage “may become so exorbitant that it doesn’t exist for
you or your employer may not be able to afford it,” stated Edwin
Park of the Center on Budget and Policy Priorities (Wall St
J, op cit.).
At present, there is no common risk pool, observes
Greg Scandlen of the Galen Institute, but rather tens of
thousands of little risk pools. Moreover, the cost of
comprehensive coverage is already so high that more employers and
workers are doing without insurance altogether.
What PNHP has in mind, of course, is to create a giant risk
pool with national health insurance. However, “there is no
pooling when government pays,” writes Linda Gorman of the
Independence Institute. “Government payment is an entitlement,
not insurance. Raw political power decides what government will
spend on health care and who it is going to spend it on.
Government has no contractual obligation to… allow you access
to medical care. In the Netherlands, it simply encourages
physicians to murder citizens judged to be consuming too many
medical resources.
“Private insurance companies, on the other hand, have
contractual obligations, and it is one of the wonders of the
market system that they generally meet them.”
Reliance on force vs. trust in voluntary contracts is the
key difference between “social insurance” (compulsory income
redistribution) and true insurance. The new plans based on
consumer choice are “another nail in the coffin of health
insurance as a form of social insurance,” writes Victor Fuchs of
Stanford University. He expects national health insurance to come
to the U.S. in the wake of war, depression, or large-scale civil
unrest (N Engl J Med 2002;246:1822-1824).
There may be only a narrow window of opportunity to avert a
crisis in the affordability and availability of medical care,
leading to cries for a government takeover from desperate
patients and doctors trapped in the system. “Our society has been
infected with a cancer called socialism,” writes Joseph Lee Pugh.
“If it isn’t stopped this time, it won’t be stopped again.”
Citing the language of the bill, which will “keep judges,
lawyers, tax attorneys, accountants, lobbyists, benefits
counselors, financial advisors, and government bureaucrats fully
employed for decades,” Craig Cantoni calls HSAs “the antithesis
of a free market.” It’s a “bizarre combination of Marxism and
free-market capitalism that is embraced by a large number of
conservatives.” “Marxicon economics,” he says, results from
accepting the assumption that government should tax retirement
savings in the first place.
This small opening for consumer-directed medical care could,
however, awaken Americans to the fact that combining insurance
and medical care is “like buying a month’s worth of groceries at
the Seven-Eleven,” explains Frank Timmins.
Talented physicians are opting out of third-party payment.
Customers are demanding lower prices. The American Hospital
Association is demanding a safe harbor from the Anti-Kickback
Statute for giving uninsured patients a discount. Nonprofit
hospitals are opening cash-based clinics. Prices are being posted
on the internet. The “Health Care Rebellion” is well underway,
writes Joseph Lee Pugh. It could be, in Churchill’s words, “the
end of the beginning,” if not the beginning of the end.
Insights in Medical Economics
Risk v. Certainty. One insures risks events that might
not occur. One pre-funds certainties such as the balloon payment
on the mortgage [or retirement income]. People must under-stand
that if they are lucky in life they will pay more in life and
medical insurance premiums than they receive in benefits (just
like home and auto), and this is good. A large part of the
problem in medical financing results from confusing the purposes
of insurance and pre-funding. –Gerry Smedinghoff
The Insurance Business and Casinos. Casinos do not
gamble; they manage risk, basing all their decisions on
statistics derived from the results of millions of bets. Insurers
should also know exactly what their returns will be, given a
large number of risk-takers (insureds). The more certain they are
of results, the more they can lower their loading (margin).
Unlike gamblers, smart subscribers should transfer catastrophic
risk to competent risk managers to pool with predictable numbers.
If casinos were “risk-adjusted” and gamblers’ bets all
defined by a federal bureaucracy, the most inefficient casinos
would win, and the most efficient would lose. The most important
issue would become “how do we game the risk adjustment?” –Art Jetter
“Consumer-Directed Health Care” is a concept, not a
product. CDH is designed to promote a generation of value-
conscious customers. Mature technology exists to provide “price
transparency” on the internet as well as information and decision
support. The future is in flexibility and customization.
–Kevin Haugh, Business and Health Archive, 1/10/04
Opportunity for Upstarts. Giant insurers have no
interest in seeing fully half of their cash flow disappear into
the private savings accounts of 280 million individuals. I will
cry crocodile tears over the down-sizing of this out-of-control
industry!
–James G. Knight, M.D.
Insurance Has Always Been Risk-Rated. It cost more to
insure the contents of a ship going to the Barbary Coast than one
just crossing the English Channel. Ben Franklin’s first insurance
company in Philadelphia charged people living in wooden houses
three times what it charged people in brick houses. Some people
claim that folks can’t help being sick and thus should be immune
from risk-rating. Yet people who can’t help being old pay more
for life insurance and people who can’t help being young pay more
for auto insurance. People who are more likely to incur claims
are willing to pay more for coverage; they value it more. –Greg Scandlen
Waiting Times
At www.nhs.uk, you
can enter a postal code and find the waiting times for various
procedures and consultations. Russell Faria, D.O., of Newport,
OR, suggests the exercise of entering codes for impoverished and
affluent areas to check for discrimination by postal code.
Waitlist times for Alberta, Canada, are available at www.health.gov.ab.ca
.
More than 90% of stroke patients at Singapore General
Hospital and Tan Tock Seng Hospital wait less than one hour for a
CT scan, says Minister of State Balaji Sadasivan. Hospitals
charge for the test and expect to recover their costs.
Doctors Design Their Own Savings Plans
Cheryl Reichert, M.D., Ph.D., of Montana writes that our
current “non-system” has entered a self-perpetuating feedback
loop with “spiraling costs for health insurance increasing the
number of uninsured, [which accelerates] cost-shifting to the
insured.” In the competitive global economy, U.S. employment
opportunites are reduced. She predicts government-sponsored and
rationed care within a decade unless we have major reform.
Instead of spending $500 to $700 per month on a
“traditional” policy like other members of her professional
corporation, she bought a $20,000-deductible policy sponsored by
the AMA for $1,108 per year and banked $500 per month. When
premiums increased 40%, she switched to a $40,000 deductible. In
5 years, she has saved $30,000.
Dr. Reichert has not been able to locate other comparable
plans; insurance executives tell her that very few families can
afford this level of risk. But how can they afford the $500 to
$700 monthly premiums that exclude most of the routine care that
they actually use? They could, she says, take out a high-interest
loan to cover the deductible if necessary.
Dr. Reichert chose a simple savings account that is not tax-
sheltered: “I didn’t want to be limited to annual government
limits or conditions on how these dollars may be used.”
Michael Harris, M.D., of Michigan writes that a $10,000
deductible or higher provides much greater savings than the plans
approved for MSAs or HSAs. He uses an HRA for himself and his
employees to pay for premiums and routine care. He deposits
$1,000 per month (after taxes) into a conservative investment
account. For the same amount per year as he was spending with the
Blue Cross PPO that he cancelled in 2001, he has accumulated
$27,000 in two years.
“Employees do not understand that they are wasting part of
their employment benefit in getting first-dollar coverage….
Everyone is paralyzed by (uninformed) fear,” he writes.
A Patient’s View
A patient who asked AAPS for a referral to a physician who
likes cash-paying customers writes: “I am a small business owner
who has had a Golden Rule MSA for more than four years. Even
after increasing four-fold since we signed up for the plan, the
MSA premiums are still only half of what PPOs and HMOs currently
charge…. I have managed to bank a substantial amount of pre-tax
money…that would otherwise be in the pockets of an insurance
company.” But insurance people try to scare people with the “huge
risk of a $5,000 bill.”
AAPS Calendar
Oct. 13-16, 2004. 61st annual meeting, Portland,
Oregon.
Pain Doctor Wins License Back
The Alabama Court of Appeals has overturned the revocation
of a pain doctor’s license by the state medical board. Eley
v. Medical Licensure Comm’n of Alabama, 2003 Ala. Civ. App.
LEXIS 740 (Sept. 23, 2003). The court cited decisions in the past
6 years in Colorado, New Jersey, Ohio and Louisiana that reversed
medical board sanctions for being “manifestly excessive in
relation to the need to ensure public safety.” The Alabama court
emphasized that a pain “physician’s conduct will be evaluated to
a great extent by the treatment outcome, taking into account
whether the drug used is medically and/or pharmacologically
recognized to be appropriate for the diagnosis, the patient’s
needs including any improvement in functioning and recognizing
that some types of pain cannot be completely relieved.”
Most Influential Trials
The ten most influential trials affecting American history
are summarized by AAPS General Counsel Andrew Schlafly under “Legal Issues” at
www.aapsonline.org. These range from the trial of
William Penn in 1670 and John Peter Zenger in 1735 to that of
William Jefferson Clinton in 1999.
For physicians facing trials for prescribing controlled
substances, the most important case to review is probably State of Kansas v. L.
Stan Naramore, D.O., 25 Kan. App. 2d 302;965 P.2d 211;
1998 Kan. App. LEXIS 79 (AAPS News, Oct 1998).
The court stated: “While criminal guilt may be established
by circumstantial evidence, the facts and circumstances in
evidence must not only be consistent with each other and with the
guilt of the defendant, but they must also be inconsistent
with any reasonable theory of the defendant’s innocence.”
Tip of the Month: Both Adams and Jefferson viewed
jury power as the ultimate check on tyranny. “Jury nullification”
is the right of jurors to decide a case based on conscience, even
if in conflict with the legal instructions given them by the
court. A New Jersey appellate court just upheld this doctrine by
siding with a juror who candidly told the judge she could not
follow his instructions. State v. Jenkins, A-1271-02T4
(App. Div. Dec. 18, 2003). The trial judge had dismissed and
replaced her in the jury deliberations. The Appellate Court
reversed the subsequent jury verdict, holding that refusal to
follow jury instructions is not a valid basis for dismissing a
juror.
Medicaid Pays for Drug Habits
While doctors who treat Medicaid beneficiaries may go to
prison for their patients’ drug abuse or diversion (see www.aapsonline.org/painma
n/actionsagainst.htm), the Medicaid program itself
enables the drug trade. Some prescriptions that beneficiaries can
fill for a copayment of $1 may be worth thousands of dollars on
the street.
Kicking drug dealers out of the system would deter abuse,
say police officers. “You cut five or 10 people off and put that
in the paper, it would cause a bigger ripple than arresting 75
people in one county,” said Capt. Mike Reichenbach of the
Kentucky State Police drug-enforcement unit. However, federal
rules prohibit ending benefits for recipients based on criminal
convictions in state court, except while they are actually in
prison. Many receive probation and do not lose their benefits
(Estep B, Herald-Leader, Lexington, KY 12/28/03).
On Opioid Contracts
Physicians are under increasing pressure to force pain
patients to sign contracts accepting an array of conditions,
including the humiliation of urination on command, as a
nonnegotiable condition of obtaining relief from unremitting
agony, writes Frank Adams, M.D. The result: “the therapeutic
alliance is replaced by an adversarial relationship.”
The existence of such contracts gives the physician no
protection from official sanctions, although not using contracts
can result in an accusation of disregarding “recommended
guidelines,” arbitrarily interpreted as a standard of care.
Contracts are supposed to prevent diversion, but there is no
evidence that they actually do so. “The pain contract is nothing
more than ritualistic behavior in support of a myth fueled by an
ideology” (Adams F. Editor’s corner, April/May 2003, www.texaspain.org).
Self-Funding Persecution
At the 60th annual meeting, Professor Ronald Libby of the
University of North Florida presented figures from the Annual
Reports of the Departments of HHS and Justice for the Health Care
Fraud and Abuse Control Program (HCFAC). In 2001, $408 million
was allocated and $1.36 billion was “recovered,” including $454
million under the False Claims Act, $124 million from OIG audits,
and $83 million paid to qui tam relators. Libby concludes:
“HCFAC is a self-funding and unaccountable bureaucracy
targeting physicians for investigation and prosecution. Funds
taken from doctors are recycled for further investigations and
prosecutions of doctors.”
Sham Peer Review Rampant
In a chilling series of articles published in the Pittsburgh
Post-Gazette (www.post-gazette.com), Steve Twedt
writes how physicians who try to protect their patients from harm
can be labeled “disruptive” and possibly have their careers
ruined.
“While it is unknown exactly how many physicians are
targeted for patient advocacy,” he writes, “a 1998 survey of 448
emergency physicians across the United States found that 23
percent had either lost a job, or were threatened with it, after
they’d raised quality-of-care concerns.”
The shroud of immunity and confidentiality over internal
hospital investigations protects the hospital but means that
physicians who are wrongly or maliciously accused may have no
meaningful due process. Courts almost uniformly refuse to get
involved (Twedt S, Post-Gazette 10/26/03).
Judge Resigns Over Sentencing Guidelines
Developed in 1986, the federal sentencing guidelines were
meant to assure similar sentences for similar crimes nationwide.
Combined with mandatory minimum sentences heralded as the
solution to the “war on drugs,” the result is too often lengthy
sentences for “street criminals” but not for drug kingpins.
Retiring at the age of 60, U.S. District Court Judge Robert
Cindrich said: “When the law provides a result that is repugnant,
we must still follow the law. And you can only do that so many
times before you start to wonder, `How many more times am I going
to put my name on this sentence that I don’t believe in?'”
Correspondence
New York Clawback. The new instructions promulgated by
the N.Y. Dept. of Health for filing claims for “dual-eligibles”
(Medicare/Medicaid patients) are so costly and complex that small
practices will not be able to bear them. But just to make sure
that hospital-owned clinics will have a significant advantage
over solo practitioners, the new law provides that “hospital
based/freestanding clinic services” will receive the full
coinsurance amount, while independent physicians receive only
20%. To collect the paltry 20%, the physician will have to file
two Medicaid claims (plus the Medicare claim) for each service:
one for the deductible, and one for the coinsurance. Worse, the
State’s claim processing system wasn’t programmed to handle the
new rules when the law went into effect in July 2003. Because of
the “overpayments” made to physicians, the State will be “making
retroactive adjustments to recoup the payments made in excess of
the reduced coinsurance amounts for claims that have already been
submitted (July 1, 2003, through December 10, 2003).” This will
be done gradually, over several payment cycles in the first
quarter of 2004.
It’s time for physicians to wake up and smell the frog.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY
Cognitive Dissonance. I understand that the current
crop of history students is being taught the evils of the past:
monarchs were immoral because they looted the people. Yet
students learn from the very same textbook that their progressive
government is moral when it loots every grandchild to shower
grandma with free drugs and medical care.
Robert P. Gervais, M.D., Mesa, AZ
Taxpayers Buy Cigarettes. I once did a survey of all
TennCare patients admitted to the emergency room: 85% of them
admitted to the triage nurse that they smoked. I asked them how
much they smoked and told them how much it cost. One pack per day
cost $1,000 per year, 2 packs $2,000. They had never done the
math. I really would have no problem with their smoking or
drinking if it weren’t on the taxpayers’ tab.
Robert S. Berry, M.D., Greeneville, TN
I once did the same: $3,000 per year amounts to $150,000
over 50 years. If a person saved this amount, and it doubled
every 7 years, the approximate life-time investment equivalent is
about $1.2 million. This shows that no one who has a little self-
discipline needs to be on welfare. Some patients got really angry
and said I had no right to make moral judgments. One reported me
for harassment. I decided it wasn’t worth the risk. Government
control has built-in safeguards against correction.
Delbert H. Meyer, M.D., Carmichael, CA
Representation without Taxation. Under our progressive
tax system, many inhabitants do not pay income taxes, though
there are hidden taxes and sales taxes. Some even get “refunds”
for taxes they did not pay! Then there are “welfare” payments,
though they may be unconstitutional. It’s time for a change.
Robert M. Webster, M.D., Jasper, GA
Freedom for All. Let me as a patient contract with any
insurer for anything we can mutually agree upon. Let me as a
patient contract with any physician for any service we can
mutually agree upon. No more pacts with the devil (like the AMA
teaming up with the trial lawyers for a “Patients Bill of
Rights”). Freedom for me means freedom for you and for insurers,
brokers, hospitals, and everybody else. One person’s freedom
cannot be enhanced by diminishing another’s.
Greg Scandlen, Frederick, MD
No Programs, No Mandates, No Systems! Too often, we get
trapped into the idea of “creating” markets, or devising complex
plans that “utilize market forces.” You can’t “direct” a market,
at least not very efficiently. Markets direct themselves. We are
usually best served by getting out of the way.
Sean Parnell, Heartland Institute
What About the Poor? We must demonstrate that the old
and the sick are the ones who get hammered when medicine is
centrally controlled by bean-counters. A group of disabled
Medicaid dependents in Colorado have organized to protect the
severely disabled from Medicaid. They want the cash to arrange
their own care. It’s tough to argue that expanding Medicaid is
the best thing for the vulnerable when people intimately familiar
with the program sit there in wheelchairs and tell you you’re
wrong. The educational voucher folks have been brilliant in
taking the moral high ground away from public schools. We need to
do the same for public medical care.
Linda Gorman, Englewood, CO
Why I Quit Medicare. It is illegal to accept money from
any Medicare beneficiary, beyond the fee rules, for any covered
service. If I accept 1 cent more for better or more timely
service, I am a felon, like in Cuba, North Korea, and Canada.
Even heavily socialized countries like England and France have an
extensive market for private care. Just walk in and pay.
Medicare has become a welfare program for the middle class.
Doctors hate it for the underpayment and endless hassles.
Patients hate it for the lack of access to the good doctors who
have quit and the third-rate care the “benefit” now buys. I want
my Medicare benefit to go into my HSA, so I’m in control of the
money. Then I’ll be free.
Herbert Rubin, M.D., UCLA School of Medicine
Legislative Alert
Medicare Fallout
Let’s get this out of the way, so there is no
misunderstanding. The Health Savings Accounts (HSAs), in Title
XII of the Medicare Prescription Drug, Improvement and
Modernization Act, are clearly the most desirable provisions of
the otherwise flawed new law. But of course HSAs have nothing to
do with Medicare. Nonetheless, for the first time, all Americans
under the age of 65 will be able to take advantage of a more
robust form of medical savings accounts (MSAs).
The new law sets a cap on contributions at $2,600 for
individuals and $5,150 for families. For persons between the age
of 55 and 64, there will be a catch-up provision, allowing an
additional amount of $500, but capped at an additional $1,000 in
2009. Both employers and employees will be able to contribute to
these accounts tax free, and patients will be able to pay
directly for medical services. Already, Kay Cole James, the
energetic Director of the Office of Personnel Management (OPM),
the agency that runs the Federal Employees Health Benefits
Program (FEHBP), is exploring ways to extend the HSA option to
the FEHBP in 2004. Conservatives, libertarians, and champions of
the free-market policy all applaud the effort. It is a
significant victory for consumer choice and competition.
Now, let’s get back to Medicare. The fallout from the
Medicare explosion continues, and the policy and the politics are
going to be affected in strange ways over the course of the next
three election cycles. If anyone in Congress or the White House
thought that the enactment of this legislation was going to take
Medicare “off the table,” as they say, they don’t belong in the
politics business. That business is for grown-ups. So, a few
observations while the dust is still settling:
It is far short of real Medicare reform. In terms of
the “premium support”/FEHBP style competitive model endorsed by
the Bipartisan Commission in 1999 and the Bush Administration in
2001, the provisions of the new Medicare law are far short of
Medicare reform. Tom Scully, Administrator of the Centers for
Medicare and Medicaid Services (CMS), admitted as much when he
told Professor Uwe Reinhardt of Princeton that “I don’t know if
folks really understand this, but the reforms we’re now talking
about are really quite modest by comparison with what was
floating around two or three years ago” (Health Affairs,
Nov/Dec 2003).
The “Premium Support Demo” is a fat target for the Left.
While Section 241 of HR 1, the House version of the Medicare
bill, provided for an FEHBP-style reform, in the final language
of the House-Senate conference report that provision was watered
down to a mere 6-city demonstration project beginning in 2010.
The proof that this was broadly understood to be a toothless
provision was evident when Senator Max Baucus (D-MT), in a
revealing November 24 Senate floor speech in favor of the bill,
told his Senate colleagues not to worry about it; it would be
repealed:
I have heard some Senators claim that this is not
the Senate bill because it contains something called
premium support, and it has a so-called slush fund. Let
me remind Senators, the so-called premium support is
extremely watered down from what was in the House bill.
It is time limited to 6 years. Only six cities will be
demonstration projects. Low-income seniors in each of
those six cities will be held harmless…. In addition,
the premiums for those who are not low income are
limited to a 5 percent change. Fee for service Medicare
is held harmless in all respects in those six cities
where there may be a demonstration project. They are
held harmless in all respects, except the Part B
premium may go up by no more than 5 percent. Any other
change in these demonstration areas has to be enacted
by Congress enacted by Congress to extend, enacted by
Congress to expand, enacted by Congress to change.
What has happened in the past when we have had
these demos? They have been repealed. They have not
been extended. In 1997, Congress set up premium
support demonstration projects. Congress then rushed in
to repeal them as quickly as they possibly could. They
were gone. The same will happen here. Do my colleagues
know why? Because the dollars provided to private
plans in the premium support demonstration areas will
be much less than in other parts in the country. The
private plans will not be able to survive.
Mark my word, those plans, those physicians, and
those providers in the demonstration MSAs are going to
come to Congress and ask us to repeal it.
Will the Bush Administration or its successors really
champion an FEHBP-style program, with a will to see it succeed?
Good question. Last month, when HHS Secretary Tommy Thompson,
supposedly a champion of free-market competition, was asked
whether he thought the program would happen in 2010, he told Kate
Schuler of CQ Today, “I don’t.”
It is going to contain nasty surprises. They will
unfold over the next several months. Let’s look at a prominent
one: A restriction on Medigap coverage for drugs. As
with all Medicare entitlements, Congress has standardized the
prescription drug benefit to be offered by private plans. And as
Robert Pear reports, the new law also prohibits Medicare
beneficiaries from buying Medigap coverage to cover the
deductible, the copayments, or the $2,850 “doughnut hole,”
because Congress wants to avoid duplication of the benefit and
end the Medicare beneficiaries’ insulation from costs. According
to Pear, if a drug plan used a formulary, or a preferred list of
drugs, and a Medicare patient wanted to use a drug not on the
plan’s formulary, he could appeal that decision but could not
resort to additional private coverage to pay the cost of the non-
formulary drug. (NY Times 12/7/03). Needless to say, for
millions of seniors who buy Medigap coverage this will be an
unwelcome development to put it mildly.
For the record: Medigap restrictions are not exactly a
surprise. Ed Haislmaier, Visiting Research Fellow at the Heritage
Foundation, called serious attention to this on July 17 (“How
Congress’s Medicare Drug Provisions Would Reduce Seniors’
Existing Private Coverage,” at www.heritage.org/
research/healthcare/bg1668.cfm), detailing the likely
consequences, but the Congressional leadership obviously felt
that this was not going to be a problem. As with so much else in
this legislation, they were wrong.
Its costs are going to be explosive. While the Congres-
sional Budget Office (CBO) estimated that the bill would cost
$395 billion in the first ten years, CBO Director Douglas Holtz-
Eakin, in a Dec. 8 speech to the Heritage Foundation, conceded
that the bill could cost as much as $2 trillion during the 2014-
2023 period, when the baby boomers will be enrolling in Medicare
in ever larger numbers. Meanwhile, liberals in Congress have
already backed legislation that would more than double the costs
of the first 10 years. Taxpayers and seniors alike are in for
sticker shock.
Health-related spending in 2002 reached $1.6 trillion or
$5,440 per person, according to CMS economists. Drug spending
jumped 15.3% in 2002, slowing from previous years. But drug
spending is still expected to increase its share of overall
medical spending from 10.5% in 2003 to 14.5% in 2012 under
current law, without taking into consideration the impact of the
new entitlement.
It means the Era of Big Government is back. As
opined in a remarkable editorial, “The most striking thing about
the new Republicanism is the way it embraces big government. The
Bush Administration has presided over a $400 billion expansion of
Medicare entitlements.” (NY Times 12/28/03). This
expansion comes at a price, and both Left and Right will pay it.
The impending entitlement expansion will not only threaten the
Bush tax cuts, and any future tax cuts, but it could,
paradoxically enough, spell deep trouble for liberal-activist
government. Former OPM Director Don Devine, who served in the
Reagan Administration, predicted years ago that the end result of
the massive flow of dollars to retirees would otherwise be
devastating to liberal activist government for the rest of
society, so heavily based on the promotion of various social
policies and programs.
Cost containment means pain. As CBO notes, in an entitlement
program that pain can be administered through cuts in benefits,
reductions in eligibility, or cuts in payment for services. The
cuts translate into a reduction in quality and access to care.
The only “cost containment” that will work with the least pain,
and a pain that is easiest to relieve for low-income patients, is
the one Heritage, the American Enterprise Institute, and the
Progressive Policy Institute have all proposed: a “premium
support” financing system (a version of the defined contribution
approach). Perhaps when the inevitable “provider” fee cuts start
in 2007 and 2008, Congress will rethink the whole thing, and may
even go back to a reconsideration of the premium-support model.
Meanwhile, pass the anesthesia.
It’s not the political slam dunk the White House
envisioned. Seniors, particularly those with solid drug
coverage, won’t like this once they understand it. And they
will soon. Let’s start with the polls. During the height of the
Senate debate, the Galen Institute hired John Zogby to test
approval of the Senate drug bill; almost three-quarters said they
didn’t like it. More recently, according a poll released by the
National Annenberg Election survey, the support for the new law
dropped from 61% percent to 21% when respondents learned the
details (Palm Beach Post 12/31/03). Then, according to
the Kaiser Family Foundation, many voters still don’t even grasp
the basic facts. After Congress enacted the Medicare law, only
39% of adults said that they knew it passed; 49% said they did
not know it passed; and 13% did not believe that the bill had
really passed after all. In a second Kaiser survey, conducted in
December 2003, 59% of seniors knew the bill had passed, but 40%
believed that the law did not pass. Meanwhile, there is no
nationally prominent conservative seniors’ organization in the
country none that is countering the AARP on its support for the
legislation, and the AARP itself, not surprisingly, is already
losing membership over this mess. This is an historically
significant failure of leadership among seniors’ organizations.
The Left is already plowing this fertile ground. Ron Pollock
of Families USA, no ideological champion of the free market, is
planning to visit 25 states in March and April to educate the
public on the new law (NY Times 1/6/94).
Senator Edward M. Kennedy (D-MA) says that he has only just
begun to fight, and has introduced legislation to roll back large
chunks of the Medicare law and fill up the “doughnut hole.”
Likewise, Senate Minority Leader Tom Daschle (D-SD) dropped his
bill a Medicare “technical corrections” bill just before
Christmas. It would, among other things, end HSAs and kill the
FEHBP-style demo project. According to the Times,
Democrats will use every available means in the upcoming session
of Congress to amend or attack the new law.
It will mean more, not less, Congressional micro-
management of Medicare. Former HHS Secretary Donna Shalala
has already fired the first shot in what will likely be a mind-
numbing conflict over the technical issues involved in crafting
new regulations. In a recent Washington Post op ed
piece, Shalala writes, “The agency will have to make literally
thousands of decisions as it develops the rules and procedures
for this program, many of which will significantly affect
beneficiaries and prescription drug plans alike.”
Needless to say, this congressional and bureaucratic excess
does not characterize the FEHBP, which is governed by very few
rules and an entirely different set of principles.
It sets the stage for price controls on drugs. The
pharmaceutical industry will see a significant volume increase in
its product and continue investment in research and develop-ment,
and thus the production of new drugs. But recent trends are
troubling. According to CMS, 35 new drugs entered the market in
1999; 25 in 2000-2001; and only 17 in 2002.
Expect the Left to ratchet up the case for drug price
controls, either directly or through government monopsony
purchasing of prescription drugs. Already, Senator Kennedy is
arguing that the Bush Administration and its allies in Congress
are putting corporate profits ahead of patients. That rhetoric
will ratchet up over the next several months. And none other than
John Rother, a top executive of AARP, has indicated that now that
the Medicare drug provisions are enacted into law, the next big
issue will be pricing of pharmaceuticals.
Although drug stocks may react positively at first, the
long-term impact of the bill on the drug companies cannot be in
doubt. According to June 11, 2003, report of the International
Strategy and Investment Group (ISI Group):
Even though the federal government would not act as a
monopsony purchase or drugs initially, we believe
that outcome is almost inevitable. Medicare is
already a fiscal train wreck waiting to happen. Add a
drug benefit, the cost of which is expected to increase
by 12 percent per year, and Congress will have little
choice but to pay far less for drugs in the future.
The long run threat to industry is significant
because with a universal drug benefit in place,
government will be purchasing more than half the drugs
consumed in the US [emphasis in original].
Robert Moffit is Director, the Center for Health Policy
Studies at the Heritage Foundation, Washington, D.C.
