AAPS News – Jan 2004


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Volume 60, No. 1 January 2004


“The insurance industry has effectively ruined American
health care, causing multiple times the systemic damage of the
oft-maligned trial attorneys,” writes John E. Stone, Director of
the U.S. Freedom Foundation.

With average family premiums running $9,000 a year, despite
median family incomes of only $42,000, “the comprehensive health
insurance economic model is no longer viable.” Therefore, Stone
concludes, “it’s time for an all-out revolt….”

This means recognizing that the proper function of insurance
is to serve as a financial service, not a health agency. Even
many insurers have now stopped calling the product that the
uninsured lack “insurance.” In enrollment materials, Blue Cross
Blue Shield, Aetna, United, and others use the term “health care
plan” or “health benefits plan.”

An insurance contract is a two-party contract between a
consumer, who pays a premium, and a carrier, who “indemnifies”
the insured in the event of a loss. Third-party plans, on the
other hand, involve a triangular relationship, with the “insurer”
paying the “provider.” In such arrangements, there is little
accountability between the partners: and thus continuing demand
for government intervention.

After 100 years of government regulation, “we are left with
an industry that is too expensive, too bureaucratic, and too
indifferent to the needs and desires of consumers,” writes Greg
Scandlen of the Galen Institute.

In the early twentieth century, Scandlen notes, sick workers
lost two to four times as much in wages as they spent for medical
costs. As medical costs were a relatively minor risk,
comprehensive “major medical” coverage did not exist in 1940.

The first serious effort at prepayment for medical care was
a prototype Blue Cross plan in 1929. Blue Cross and later Blue
Shield, insisting that they were not insurance companies, were
organized under special enabling acts that provided them with
tax-exempt status and immunity from many insurance regulations.
Owned by hospitals, Blue Cross served to ensure them a constant
revenue stream.

The Blues’ market domination enabled them to dictate the
shape of medical benefits. Commercial insurers adopted
“assignment of benefits” as a substitute for “service benefits”
paid to “participating providers.”

Medicare was also modeled after BCBS.

In 1965, the founding of Medicare and Medicaid launched the
great spending spree. Out-of-pocket payments dropped from nearly
56% of the total in 1960 to 36% by 1967 (and 15% by 2000). Excess
demand outstripped supply and caused a surge in prices, as
predicted by basic economic theory. The government response,
Scandlen writes, was to “create a vast bureaucracy of health
planning agencies to further reduce supply!”

In order of occurrence, Scandlen lists major market
distortions caused by government: (1) professional licensure; (2)
state laws enabling hospitals to form vertically integrated
payment systems; (3) exemption of fringe benefits from World War
II wage and price controls; (4) a tax break only for employer-
provided insurance; (5) federal seed money only to hospitals,
encouraging high-tech institutional care; (6) an antitrust
exemption solely for insurance; (7) Medicare and Medicaid; and
(8) “cost-containment” programs, including price controls and
certificate of need.

Health benefits are unaffordable, with no end in sight for
the cost spiral. A young family in New Jersey has $600 per month
taken from its paycheck for an employer-sponsored HMO, and pays a
$30 copay for each office visit while the total cost of all
childhood vaccines is about $450 per child.

If this family could buy a $5,000 deductible policy for $250
per month (forbidden by New Jersey law), it would have an extra
$350 per month and could accumulate savings sufficient to cover
the deductible in a little more than a year, if it were not for
taxes. Most will not need to spend all of their savings for
medical care. Compare the potential economic stimulus to that of
the tiny Bush tax cut of $30 per month.

The main impediment to realizing this savings apart from
state mandates and the tax code, the latter ameliorated if the
Health Savings Accounts (HSAs) in the new Medicare law survive
Sen. Daschle’s attempt to repeal them is fear.

The realistic basis for fear is the enormous burden of cost-
shifting imposed on patients who pay directly. Hospitals are the
most recalcitrant in resisting negotiation and have even used
“body attachment” having patients arrested for nonpayment of
grossly inflated charges (Wall St J 10/30/03).

After K.B. Forbes filed seven lawsuits against California
Tenet hospitals, AAPS California chapter president Tom LaGrelius,
M.D., was able to persuade his main hospital to give a 60%
discount from published fees on all hospital services to cash
patients who paid their bills within 30 days.

A critical mass of patients with their own money to spend,
as in HSAs, could create powerful disruptions in existing third-
party arrangements. “Stop the HSA Tsunami!!” writes Don McCanne,
M.D., President of Physicians for a National Health Program
(PNHP), listing the usual objections (www.pnhp.org).

“HSAs and consumer empowerment will be the death of their
long-cherished hopes for a nationalized health insurance scheme,”
writes Greg Scandlen, rebutting PNHP objections (Consumer
Choice Matters
#42, 12/02/03, see www.galen.org).

Physicians can take insurance reform “in their own hands
right now,” states AAPS President Mark Schiller, M.D., in a
letter to the editor of the Wall Street Journal. “If
physicians would require patients to pay at the time of service,
we would start to remove ourselves from this quagmire.” If his
patients wish to use insurance, they can submit his bill
themselves for reimbursement while remaining in control.

CPT Codes and AMA Revenue Safe for Now

A little noticed provision of the Medicare expansion, H.R.1,
on p. 583, Subtitle E, Sec. 941 (d) reads: “The Secretary shall
carry out a study of…systems other than current coding and
documentation requirements for payment for physician services”
and report to Congress by October 2005.

On Nov. 5, the National Committee on Vital and Health
Statistics (NCVHS), as part of its responsibilities under the
Health Insurance Portability and Accountability Act (HIPAA),
recommended that the ICD-10-CM and ICD-10-PCS be adopted as the
HIPAA standard, replacing ICD-9-CM. NCVHS concluded that the
benefits would outweigh the significant implementation costs.
Only in-patient procedure codes would be affected; CPT-4 would

ICD-10 proponents lobbied Congress to include instructions
to implement this code set in all settings as part of Medicare
reform. The AMA lobbied aggressively to prevent a move to ICD-10
in physician offices.

“The AMA developed CPT codes in 1966, and in an agreement
with the Association, the government in 1983 adopted the codes
for reporting physician services in Medicare. The AMA generates
significant revenue from the licensing of CPT codes,” writes
Markian Hawryluk (AM News 10/20/03).

“Right to Die” Groups Merge

Last Acts, the beneficiary of 6 years of grant support from
the Robert Wood Johnson Foundation (RWJF), has merged with
Partnership for Caring to form Last Acts Partnership. An RWJF
grant is in process to help transition to multiple funding
streams to help support vigorous advocacy for social change.

“The actions of these groups, while helping in many ways to
promote better end-of-life care, threaten to sabotage the very
best of end-of-life care because `aid in dying’ (killing the
patient) is incompatible with dedication to provide the very best
care till a natural death occurs in its own timing,”
writes Ron Panzer of Hospice Patients Alliance.

Physician Backlash

In the wake of an 80% reduction in copayments for dual-
eligible patients, 58% of New York physicians have considered
disenrolling from Medicaid, and 73% from Medicare, according to a
survey conducted by the Medical Society of the State of New York
(MSSNY’s News of New York 11/03).

“As a result of this new state initiative to further enslave
physicians, we may see patients crossing the border into Canada
to obtain medical care,” writes AAPS Director Lawrence Huntoon,
M.D., Ph.D., of Lake View, NY.

RIP: Francis Coy, M.D.

Francis M. Coy, M.D., of Orange City, FL, an anesthes-

iologist, died on Dec. 1, 2003. For service in World War II, Dr.
Coy received the Bronze Star, the Combat Medical Badge, and the
Asiatic Pacific Ribbon with three Battle Stars. His medical
career spanned 45 years. Dr. Coy served AAPS as National
Membership Chairman from 1972-1976 and as a Director from 1974-
1976. He is survived by his son James F. Coy, M.D., who was
President of AAPS in 1988 and is currently an AAPS Director and
Chairman of AAPS-PAC.

Medicaid Recipients Can Be Billed

The July 2003 Medicaid Update issued by the New York State
Dept. of Health announces in a headline that “Medicaid recipients
cannot be billed.” However, the article reads:

A provider may charge a Medicaid recipient,
including a Medicaid recipient enrolled in a
managed care plan, ONLY when both parties
have agreed PRIOR to the rendering of the
service that the recipient is being seen as a
private patient. This must be a mutual and
voluntary agreement. It is suggested that the
provider maintain the patient’s signed
consent to be treated as private pay in the
patient record.

The physician must also notify Medicaid managed-care
enrollees ahead of time that “the services may be obtained at no
cost to the recipient from a provider that participates in the
recipient’s managed care plan.”

Physicians may not charge privately for ER visits.

“This is the same type of bureaucratic spin that we saw
following Judge Politan’s ruling in Stewart v.
,” writes Dr. Huntoon. “The Judge found no written
rule to prohibit private contracting with Medicare patients, and
HCFA continued to forbid it anyway.”

Sign Contracts “Just in Case”

In an information sheet for his patients, Robert Shannon,
M.D., of Country Doctor House Calls, Bear Lake, MI, advises his
patients to sign a private contract with a physician who has
opted out of Medicare before they need services.

“You can only sign a contract when you are not
sick, or maybe a little bit sick but don’t need to be seen right

Dr. Shannon offers patients the opportunity to sign
contracts, which are valid for two years, at no cost. “Of course,
you can still see your regular doctor who takes Medicare, and you
are under no obligation to call us ever: but if you have not
signed the government contract, and call us when you get sick, we
won’t be able to see you.”

Dr. Shannon charges $35 for a 20-minute home visit, if the
patient calls before noon, $45 if before 6 p.m., and $75 between
6 and 10 p.m. Off-hours visits (Sunday, Monday, and when closed
for the day) are $95. Longer visits cost extra. A full one-hour
visit is only $40 more than the basic charge.

AAPS Calendar

Jan. 16, 2004. Board of Directors meeting, Orlando,

Jan. 17, 2004.
Thrive Not Just Survive IV:
Practice manage- ment seminar, Orlando Science Center.

Oct. 13-16, 2004. 61st annual meeting, Portland,

AAPS Objects to Language “Guidance”

Although the recently published revision of guidance
concerning EO 13166, which requires physicians to provide
translation services for patients with limited English
proficiency (LEP), supposedly allows more flexibility, the rule
is still unconstitutionally vague, stated AAPS in written

The frequent use of undefined phrases such as
“meaningful access, reasonable steps, meaningful
opportunity, critical services, timely manner,” and the
like, result in a guidance document that provides no
real guidance at all. Recipients cannot establish with
reasonable certainty that they have met some entirely
subjective standard of compliance in an area such as
language that is in constant flux.

The threat of litigation or prosecution adds risk to
treating LEP patients. For example, a refugee assistance agency
in Maryland distributes the following notice to clients:

My name is ______. I have limited English
skills and require qualified language assistance in

Title VI of the Civil Rights Act of 1964 requires
that your office provide a qualified interpreter for me
to have equal access to your services. It is a
violation of the law for you to require me to bring my
own interpreter in order to receive services.

If you have any questions about how to comply with
these legal requirements, call the U.S. Department of
Justice Civil Rights Division at 1-888-848-5306

The Office of Management and Budget (OMB) estimates that
physicians’ offices would incur $156.9 million of the total
$267.6 million cost of the LEP Rule.

The AMA calls for federal funding of interpreter services
(AM News 10/13/03). (AAPS urges
withdrawal of the Rule

AAPS Supports Aimster Petition for Writ

Can an internet service be completely shut down unless the
provider polices every transmission for potential copyright
infringement? To impose secondary liability expansively would
permit a single copyright holder to hold entire industries
hostage, as the Supreme Court has found. What applies to music
could also apply to statement and criticism of medical codes.
Therefore, AAPS assisted in drafting a Petition for Writ of
Certiorari in Deep v. RIAA et al., see aapsonline.org.

Pediatric Testing Requirement Passed

Led by Sen. Hillary Rodham Clinton (D-NY), Congress passed
legislation that effectively overturns the victory of AAPS and
the Competitive Enterprise Institute in AAPS et al. v U.S.
FDA et al
. (AAPS News Dec.

The effect will be to increase drug costs, make guinea pigs
of children, and put everyone at risk as the introduction of new
drugs is delayed, writes Henry I. Miller, M.D. (Health Care
, 1/03). “It is a disturbing example of Big Brother
deciding where private R&D resources are best spent.”

Ethical problems in pediatric drug testing have been
extensively discussed by Vera Sharav of the Alliance for Human
Research Protection (



). The bill contains no protections against exploiting
children for profit, Sharav observes.

HIPAA Enforcement

“Given the slow rate of penetration, enforcement may be the
only way to spur the industry into compliance,” stated Rachel
Foerster of Beach Park, IL. If CMS doesn’t enforce compliance
well, she said, “you might as well kiss [transactions] compliance
[goodbye]. You might as well say it is dead.”

Contingency plans could phase out in early 2004. But if
there is no shift in industry readiness over the next four
months, private plans will probably continue to accept old
formats, Foerster believes (HIPAA Compliance Alert

“Sooner or later we’re going to have to face [enforcement],
a CMS official told Eli Research, but “we’re not going to set a
date” (Eli Research Compliance Alert, 12/03).

As to the Privacy Rule, Janlori Goldman, director of the
Health Privacy Project, complains that the Office of Civil Rights
(OCR) has yet to impose even a $100 fine, despite receiving 2,000
complaints. Under HIPAA, the Secretary of HHS has the power to
conduct compliance reviews of covered entities. Ms. Goldman
believes that OCR is “abdicating its responsibility” by its
failure to seek out violators, instead relying on consumers to
make reports.

WSMA Protests Proposals to Seize Property

The Washington Dept. of Health has proposed changes to the
Uniform Disciplinary Act that would permit it to enter a
physician’s office and seize property, such as computers, totally
disrupting a practice. Also permitted would be self-executing
orders that could impose a final action without a hearing.

The Washington State Medical Association (WSMA) strongly
opposed these amendments at a November “work group” meeting: “The
notion of health care professionals, or any class of citizens,
giving up their due process rights because of a few undocumented
instances is poor public policy and contrary to the very
principles upon which this country was founded” (WSMA
Membership Memo

Four Stages of Marxist Systems

An economic system based on the Marxist Labor Theory of
Value ignores market information and fixes prices in an attempt
to achieve a predetermined result. Medicare and Medicaid are
examples. All such systems have failed and will fail. There
cannot be a rational allocation of resources when participants
are rationally ignorant because they are not responsible for the
consequences of their actions.

The stages of failure are: (1) a New Economic Policy; (2)
shock workers; (3) show trials to root out “wreckers and
saboteurs”; and (4) purges.

In Medicare, we have seen (1) DRGs and CPT codes; (2) fee
cuts under the Resource-Based Relative Value Scale; (3)
prosecutions for “fraud and abuse.” What will happen when
patients can’t find a physician to care for them, or when the
system runs out of funds to pay claims?

The “most important change which extensive government
control produces is a psychological change, an alteration in the
character of the people. This is necessarily a slow affair, a
process which extends…perhaps over one or two generations….
[E]ven a strong tradition of political liberty is no safeguard if
the danger is precisely that…policies will gradually undermine
and destroy that spirit.”

Friedrich Hayek, The
Road to Serfdom


The “Right” Number. According to a New York State
Health Department official, the government is poised to begin
regulating specific surgeries, producing “report cards” for
hospitals that include the number of procedures done. Carotid
endarterectomies are the first target.

Academic physicians at large institutions will probably be
fully cooperative with this government initiative. Hospitals that
meet arbitrary frequency parameters will be declared “Centers of
Excellence,” and others will be labeled as providing substandard
care. It is far easier to ration care and thereby control costs
if supply is limited. It is far easier to regulate a small number
of compliant sheep than a large number of independent entities.

Although volume and morbidity and mortality statistics are
important in selecting surgeons and hospitals, patients and their
referring physicians need to be in control of making the choices.
Timeliness and access may be of equal or greater importance as
for acute stroke when there is only a three-hour time window for
administering t-PA. Steering patients to urban centers will also
cause rural physicians to lose their skills.

We have learned from prosecutors that if a physician
performs “too many” of a particular procedure, he becomes a prime
target for investigation (the outlier outlaw concept). If he
performs too few, he may be labeled “substandard.” Picking the
“right” number will be left to medically incompetent bureaucrats
whose choice will be guided by a global budget. As this equation
regresses, the “right” number may be zero.

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

Limiting Supply. The AMA achieved its objective of a
“uniform elevated standard of requirements for the M.D. degree”
by getting control of licensing and accreditation of medical
schools. I have a letter from the Illinois Health Department
stating that the AMA accredits medical schools; I had written for
the requirements to start a for-profit school. Illinois has not
had a new medical school for more than 20 years. By the way, the
Carnegie Foundation along with the Council on Medical
Education a creature of the AMA backed Flexner’s report [see
J Am Phys Surg 2003;8:37-40].

Charles Courtney, La Grange, IL

Who’s Responsible? Who held a gun to the heads of
doctors, labs, and hospitals and forced them to join PPOs? For a
truly bad idea to be successful, it must have supporters. Is it
the “evil” insurance companies that should be tarred and
feathered? Or those who joined in, thinking it would be a gravy
train, with the insurance company sending them patients and

Danny M. O’Grady, CLU, Midland, TX 

Artificial Shortages. HMOs do not negotiate with
doctors; they dictate. They present a take-it-or-leave it
contract, and when they get “enough” doctors, they close the
panel. If there are only enough surgeons to do 75% of the needed
cholecystectomies, they save 25% on that operation.

HMOs, of course, do not do well when they actually have to
give care. I saw a report about the Kaiser HMO on the left coast
that stated that if Kaiser were to provide all the annual
physicals it had promised to members, it would take 2.5 years,
providing it did nothing else during that time.

Even Stalin learned from killing the Kulaks that artificial
shortages do not lower prices or increase availability.

Stephen Katz, M.D., Fairfield, CT

An Offensive Question. I asked the head of a New York
Times regional bureau whether people should receive medical care
that costs more than their lifetime earnings. She squirmed and
didn’t or couldn’t answer. She agreed that she didn’t want to
equate money and medical care so directly. So I asked the second
question: “How many people can we treat without regard to their
lifetime earnings?” And who should decide?
Philip R. Alper, M.D., Burlingame, CA

Whom Do You Trust? Do you really want to trust [medical
decisions] to people who suspend kindergartners for using finger
guns or who herd hysterical sixth grade girls into a room, block
access to their parents, and force them to undergo pelvic
examinations by an imported doctor who was supposedly checking
for sexual abuse? Or the folks who threatened to take a child
away from his parents when they informed a counselor that they
were going to try a Ritalin holiday because of their child’s
weight loss and mood changes?

Linda Gorman, Englewood, CO

The Double Standard. Partially free-market entities
including Enron, Tyco, and WorldCom have been brought to heel.
The IRS, however, got away with blatant libel, using supposedly
confidential information to smear an innocent taxpayer (William
Simon) in the middle of a gubernatorial campaign. This abuse of
federal power did not even rise to the level of “poor judgment”
(Wall St J 8/27/03). But the average citizen continues
to grant a halo effect to government despite repeated gross
malfeasance that dwarfs any and all corporate crimes.

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

Time for Rebellion? The majority of seniors want choice
but are forced into Medicare. Maybe it’s time for them to opt out
of Medicare and demand that Congress give them their equivalent
dollars to buy insurance or pay cash to doctors.

Joseph Lee Pugh, Diamondhead, MS

Legislative Alert

The Big New Medicare Law

On December 8, the President signed the Medicare
Modernization and Prescription Drug Act of 2003.

The good news is that the law contains a provision, Title
XII, that has nothing to do with structural changes in Medicare:
the creation of the new Health Savings Accounts (HSAs), a new and
improved version of medical savings accounts (MSAs), which will
be available in 2004. This is a major change in the structure of
the commercial health insurance market. Now, at last, Americans
will see a real market test of the concept.

Then, there is the not-so-good news. The HSAs have come at a
very high price. With the addition of a universal prescription
drug entitlement, the bill is the largest single expansion in the
history of the Medicare program. While the Congressional Budget
Office (CBO) has initially estimated the costs of the bill at
$395 billion over ten years, these preliminary estimates only
constitute a down-payment on the drug entitlement, and the
program will face rapidly rising costs in years to come,
particularly when the baby boomers start to retire.

The story of how the Medicare conference report passed the
House and Senate is already passing into the realm of dark
legend; the House episode is unprecedented. One thing is clear:
no one can claim that this is a product of congressional
consensus; it is a reflection of deep congressional division,
both between and within both political parties.

As the press reports have made abundantly clear, this was
not the finest hour in the patchy Congressional annals of good
government. The big package 1,100 pages of legislative text and
explanatory conference language was only available to Members of
the House for a 28-hour period. Merely reading it was virtually
impossible except for especially gifted speed readers. Moreover,
large chunks of it are simply impenetrable to ordinary folks. As
one Capitol Hill observer noted, reading the legislative text was
like trying to slog through an owner’s manual for the Space

House Drama

On November 22, at 3 a.m., the Medicare bill was failing
by two votes: 216 to 218. The standard 15 minutes for the vote
had passed. So, the congressional leaders decided to keep the
vote open. By 5 a.m., opponents of the bill were still winning
216 to 218, and conservatives who wanted real free-market
competition were not budging. In a desperate search for the magic
number, the House congressional leaders held the vote open for
almost three hours, having the President make selected calls and
otherwise trying desperately to get conservative Republicans to
change their minds. Finally, Reps. Butch Otter (R-ID) and Trent
Franks (R-AZ) were persuaded to go along. The final vote, just
before 6 a.m., was 220 to 215.

But there is a remarkable story here. Twenty-five
conservatives, led by Rep. Pat Toomey (R-PA), held to the line
they had drawn in the sand and voted no. They defended the
principle of limited government throughout the wee hours of the
morning of November 22, the anniversary of the death of President
John F. Kennedy, author of Profiles in Courage: a book
about men of both political parties who demonstrated political
courage, willing to sacrifice their political fortunes rather
than bow to powerful interests.

Senate Spectacle

In the Senate, after escaping a filibuster threat led by
Senator Edward M. Kennedy (D-MA), the Medicare conference report
passed on November 25 by a vote of 54 to 44. Kennedy’s planned
filibuster, briefly energized by the doings in the House, could
not be sustained, and neither could points of order on procedural

The Explosive Cost Issue

Just before the House and Senate votes, the CBO
estimated the cost of the bill at $395 billion over ten years,
but stated that this was simply a preliminary estimate. The CBO
staff had not had the time to go through the legislative
language. In his November 24 speech opposing the bill, Sen. Judd
Gregg (R-NH) said: “This is a $400 billion subsidy over the ten
years that it exists, but over the actuarial life of the program,
it is a $7 trillion subsidy $7 trillion. It is not paid
for.” According to The Washington Post, the CBO staff
told congressional leaders that the big cost increases would
really start in the second ten years of the drug entitlement, and
could reach up to $1.7 or even $2 trillion!

Senator Jeff Sessions (R-AL) and 13 of his Senate colleagues
were concerned that the CBO estimates would turn out to be
larger, and argued for serious cost containment provisions in the
final bill. In a November 11 letter to Sen. Charles Grassley (R-
IA), chairman of the Senate Finance Committee, Sessions et al.
wrote: “If the actual program costs exceeds the budgeted amounts,
the program should provide for an automatic cost or premium
adjustment to keep it within budget amounts. This is the only
of cost containment mechanism that will work. If
Congress decides that the plan needs more money, that can be
done, but we should not create an uncontrollable monster that
will devour the bulk of our health care dollars.” Needless to
say, Sen. Sessions didn’t get that kind of provision.

Devils and Details

Technical details include transferring the drug coverage
of dual-eligible beneficiaries from Medicaid into Medicare and
blocking the 4.5% cut in physician payment scheduled for 2004.
(Doctors will get a 1.5% increase in 2004 and 2005.) The new law
also provides for changes in Medicare supplemental insurance,
state pharmacy assistance programs, risk-adjustment mechanisms by
private plans, payment calculations incorporating coverage of
Dept. of Defense and Veterans Administration populations, new
preventive services under Medicare Part B, changes in the Part B
premiums and deductibles, tax-free subsidies to corporations, the
creation of a prescription drug card program beginning in 2004,
and numerous changes in Medicare regulation and administration.
While the law will be extensively examined to yield a lot of
intended and unintended consequences, the key provisions are
pretty clear.

Title I provides for a universal drug benefit under a
new Part D of Medicare, beginning in 2006.
will be eligible for a voluntary stand-alone drug benefit,
available either through prescription-drug plans or Medicare
Advantage plans. The coverage is to be standardized. The initial
Benefit will cost $35 per month, with a $250 deductible. The
premiums and deductibles are indexed to grow. In 2011, for
example, the baby boomers will pay an estimated premium of $588
and a deductible of $380. Under the initial benefit, the
taxpayers will pay 75% of the costs of the benefit up to $2,250.
The out-of-pocket “doughnut hole” is set at $2,850. (In 2011,
that gap is projected to be $4,315.) In 2006, the catastrophic
coverage will be triggered at $5,100 in total drug spending per
beneficiary; in 2011, at $7,715.

Title II provides for a new competitive system
beginning in 2006.
Under Section 221, the Secretary of
Health and Human Services (HHS) will set up a system of regional
health plans for the new Medicare Advantage (MA) system beginning
in 2006, and the MA plans must cover the entire region. The
Secretary is given authority to establish anywhere between 10 and
50 regions in the country. And in so doing, he is ordered to do a
market survey and to maximize availability of regional plans. The
Secretary will also authorize a national plan, if a plan wants
serve all regions on a national basis; this could be modeled on
the current nationwide Federal Employees Health Benefits Program
(FEHBP). This is, at least, an improvement over the House and
Senate bills, which would have forced plans to conform to a rigid
geographical requirement.

The required benefits standardization is incompatible with

free-market principles of consumer choice and competition.

Section 233 of title II provides for continuing the Medicare
medical savings accounts (MSAs); however, it imposes Medicare
payment rates on MSA plans, also incompatible with free-market

Title lI also provides for a premium support
demonstration program beginning in 2010.
The conference
report language changes the name of the competition system from
“premium support” to “comparative cost adjustment” and restricts
the demonstration to six metropolitan areas over a period of six
years. The premium support provision was the central core
component of genuine Medicare reform, which was scuttled in the
final bill.

Medicare demonstration projects focused on competitive
pricing have a rich history of failure, often being subverted by
local interests that oppose price competition. In his November 24
Senate speech in defense of the legislation, Sen. Max Baucus (D-
MT) told his Democratic colleagues not to worry about the threat
of private sector competition in 2010: it will be repealed. If
the demonstration project ever gets off the ground a big if it
will be limited. According to the Office of Management and Budget
(OMB) there are currently 370 Metropolitan Statistical Areas in
the U.S. and Puerto Rico. Premium support will be tested in no
more than 1.62% of them.

Title IX provides for various regulatory and
administrative changes
The title contains a variety of
rule changes and administrative changes, and many of them are
welcome, simply because they reflect a final triumph of common

Section 902 sets a 3-year deadline for the issuance of final
Medicare regs, except under “exceptional circumstances.” Whether
this is a good thing or a bad thing depends, of course, on the
regs themselves and whether one thinks, on the basis of painful
experience, that a speed up in the Medicare regulatory process is
desirable. Often it would be just was well if many of the
proposed and final regs never saw the light of day. So, this
section could be a wash.

In Section 903, Congress finally agrees in principle that
Medicare regulations should not be “retroactive,” unless, of
course, the imposition of such a rule is necessary for the agency
to comply with statute or to further “the public interest.” Such
application, with or without the statute or for any reason,
appears to anyone with the most rudimentary acquaintance with the
textbook basics of American civics to constitute an ex post
law making a law today and applying it to an act or
practice that had occurred yesterday. Such laws are flat out

Section 903 protects doctors who rely on official guidance
from HHS or the Centers for Medicare and Medicaid Services (CMS)
from sanctions and from having to reimburse Medicare. It does not
protect doctors from such sanctions in the event of a clerical

Section 900 was to create an independent, market-friendly
agency to run the competitive plan. This was junked, leaving the
existing Medicare bureaucracy in charge, even though it is one of
the most poorly functioning agencies in Washington.

The Winners and Losers

It’s quite an achievement to blow a hole in the budget,
threaten current and future tax cuts, displace millions of
seniors from their existing private drug coverage, and earn the
very fleeting support of the AARP. The winners are: low-income
seniors without drug coverage; companies who can look forward to
scaling back or dropping existing retiree coverage; companies in
line for $71 billion worth of tax-free subsidies if they don’t
cut back retiree coverage; champions of increased power for the
Medicare bureaucracy; rural health care providers; and, of
course, left-wing advocates of entitlement expansion. In the
short run, Republican politicians, doctors escaping impending
Medicare payment cuts, and drug companies with the prospect of
increased volume of sales through the Medicare entitlement, are
also winners.

The losers are: middle-class retirees with solid private
employer-based drug coverage; union retirees with generous
private drug coverage; retirees with coverage through state and
local government employee plans (particularly in those states
facing the biggest budget shortfalls); and all current and future
taxpayers, particularly those under the age of 30; fiscal
conservatives and advocates of the original market-based Medicare
reform. In the long run, doctors still locked in Medicare’s
unreformed system of administrative pricing, and drug companies,
facing future price controls, will also be losers.

Next Month: More fallout from this explosion.

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

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