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A Voice for Private Physicians Since 1943

AAPS News – Jan 2005


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Association
of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto

Volume 61, No. 1 January 2005

RISK SHIFTING

All insurance is, fundamentally, a form of asset protection.
Subscribers pay a premium; insurers promise to pay an indemnity
in the event of a loss. The premium depends on the risk of the
event and the expected payout.

Does Professional Liability Insurance Exist?

During the “malpractice” crisis in the mid-1970s, it became
apparent that professional liability was not an insurable risk,
as the payouts could not be actuarially predicted in an age of
runaway litigation and escalating awards. As physician-owned
companies (“bedpan mutuals”) arose, coverage shifted from
“occurrence” the standard form of insurance to the newly
introduced “claims-made” policies.

Like Medicare and Social Security, claims-made policies are
a pay-as-you-go system. Whenever obligations rise (or perhaps as
investment income decreases), premiums escalate and doctors are
trapped. The instant they stop paying, they are, in the absence
of tail or nose coverage, uninsured for all prior acts even
during times that they were paying enormous premiums.

The public is probably not aware of this situation (and
would find it bizarre). But the trial bar understands very well.
It can guard against a doctor simply dropping coverage and
leaving a state such as Illinois, which has unaffordable
premiums. The doctor can’t start fresh in a low-premium state
such as Iowa and obtain hospital or managed-care credentials
without prior-acts coverage. Institutions can apparently be held
liable for judgments based on those out-of-state prior acts if
they credential the physician.

What About Caps?

A number of states have placed caps on noneconomic damages,
and President Bush favors a federal law that would override state
laws or even state constitutions that forbid damage limits. The
latter raises federalism concerns, as well as the prospect of
federal regulation of medicine. There is also the concern that
caps really don’t solve the problem.

In fact, there is already a cap on most malpractice awards:
the limit of insurance coverage. A “high-low” agreement is often
struck by litigants before the case ever goes to the jury.
Insurers insist on a confidentiality pact concerning the amount
that actually gets paid, which may be only 5 to 10% of a huge
jury award. The publicity attendant on the $100 million award
sets benchmarks for future awards (Wall St J 11/30/04

) and helps to sell policies with higher limits.

Three Strikes

As doctors begin to fight back with limits on lawyers’
compensation, as in the initiative that passed in Florida, the
lawyers have retaliated (AAPS News, Sept 2004). More than
70% of Floridians voted for a three-strikes law “aimed not at
killers and thieves but at doctors who foul up,” as described by
an Associated Press story. The measure is now held under a
temporary restraining order. Attorneys for the Florida Hospital
Association, which asked for the TRO, said it is unclear which
doctors should have their license revoked, who should oversee
enforcement, and how Florida should handle a doctor whose
incidents occurred in another state or nation.

The very words “committed malpractice” imply that a doctor
knowingly or recklessly committed a criminal act against a
patient victim. While crimes have a statutory maximum penalty, in
the majority of states malpractice does not. And while crimes are
supposed to require a mens rea, the doctor’s intention was almost
always to help a patient.

The Ultimate Effect

While the original idea of malpractice insurance may have
been to provide a means of compensation for patients injured by a
definite medical error, the current system shifts much of the
risk of death, sickness, and disability onto those who fight
against these inevitable natural events. The trigger for payout
is a violation of the “standard of care” according to some
convincing “expert.” The overhead is enormous, perhaps 70%.

Doctors, to the extent that they cannot pass the cost of
liability through to patients, are the indentured servants of the
system. Patients not only pay higher medical bills and insurance
premiums, but are increasingly unable to do anything (such as
have a vaginal birth after Caesarian section) at their own risk.
They too are trapped by a “standard of care” which could turn
out to be harmful, especially in their case.

The Final Solution, as for all other problems, could be a
government takeover. With all doctors and patients owned by the
state, the state is responsible for the outcomes. And the state
has the ultimate protection of sovereign immunity.

Is There Any Escape?

As John Hoelscher, M.D., of Madison County, IL, pointed out:
“if you must profit from the death of a loved one, there is a
better way that cuts out the middleman attorney. It’s called life
insurance.” There’s also sickness and disability insurance and
potentially the equivalent of “uninsured driver” insurance. And
if the constitution prohibits limits on awards, there can still
be limits on asset seizures or on the definition of a tort (as by
expanding Good Samaritan laws to emergency treatment in the
hospital).

By buying “malpractice” insurance, doctors have accepted the
shifting of enormous risks over which they have no control. Many
wealthy parasites feed on this system and will not relinquish
their position willingly. But what if a critical mass of
physicians were simply to say No? Lock us out and hire PAs or
let us off the merry-go-round.


What About Handicapped-Baby Insurance?

Any couple that has a child faces the possibility that the
child will be disabled and require costly lifelong care. Why
should this risk be shifted from the population of parents onto
the tiny group of obstetricians? It is argued that greater
vigilance, or a quick C-section, might have averted a tragic
outcome but obstetric advances and a five-fold increase in C-
sections have had little effect on cerebral palsy rates.

Prospective parents should buy insurance prior to the event.
They would avoid the uncertainty, delay, and agony of bringing a
lawsuit, and would be indemnified even if their doctor’s care was
flawless. The premiums should depend on the risk: such as the age
of the mother, the abortion history, the prenatal care, the
choice of birthing facility, and the prior medical history none
of which are under the doctor’s control. The parents could also
choose a more generous payout by paying the commensurate
premium.

Better Ways to Spend the Malpractice Premium

Most patients would prefer a better outcome to a malpractice
award. And about 80% of the public believes that giving doctors
more time to spend with patients would reduce medical errors
(Kaiser Daily Health Policy Report 11/18/04). What if,
instead of spending a huge chunk of money on liability insurace
each year (up to $277,000 per year for obstetricians in Florida),
doctors would: (1) put money into a special account to be used to
compensate patients voluntarily in the event of an error; (2)
take on fewer patients and spend more time with each one; (3)
hire highly qualified nurses to double-check records, follow up
with patients, do literature searches, and maybe even sit with
women during labor?

Shouldn’t patients have the choice? They could see a deep-
pocketed, probably institution or managed-care doctor who
participates in the lawsuit-lottery system and follows protocols
or assume their own risk by buying bad-outcomes insurance,
making contractual agreements with their physicians, and
participating actively in decisions about their own care?
Consumers need to demand such insurance, and legislators need to
identify and remove any obstacles to its development.

Hospitalists: More Fallout from Liability

According to the Society for Hospital Medicine, virtually
all leading hospitals now use hospitalists. If “quality
indicators” such as [short] length of stay are found to improve
with hospitalists, their use could become a performance
expectation required by law (BNA’s HCFR 11/24/04). The
program is now “voluntary,” but continuity of care and a “divide”
between inpatient and outpatient physicians are issues of
concern.

Why Lawyers Should Worry More than Doctors

Physicians lose sleep because of a rare horror story about a
colleague losing all his personal assets or a medical office
losing part of its accounts receivable. Yet there is little a
personal-injury attorney can do to collect against defendants who
have assets in a limited liability company (LLC), writes Roccy
DeFrancesco (Physician’s Money Digest 10/15/2004). Lack
of liability insurance or low limits ($500,000 or less) is a
“lawsuit repellent.” If there were no insurers to cut checks,
most PI lawyers would have to find another line of work.

What You Can Do to Support AAPS

President-Elect Kenneth Christman, M.D., of Dayton, OH,
reports that a number of members have asked for ideas on
spreading the AAPS message. He offers the following:

1. Try to arrange speaking engagements for Drs. Orient or
Huntoon or General Counsel Andrew Schlafly.

2. Offer a free membership and AAPS literature to any
medical students who may rotate through your office.

3. Encourage the formation of student chapters.

4. Plan to attend the 2005 meeting and invite friends.

5. Carry AAPS literature with you (and anti-Single Payer
Petition cards) to give to colleagues.

6. Become involved in county, state, and national
organizations and promote freedom for patients and doctors.

7. Support AAPS financially, and also the American Health
Legal Foundation and the Nino Camardese Scholarship Fund. I plan
to pay double dues this year ($650).

9. Remember AAPS in your will.

How to Get Through to Your Congressman

AAPS government affairs consultant Jack Strayer writes that
while responding through an e-mail alert is good and convenient,
this should not replace the old-fashioned personal letter.
Remember, however, that mail to Capitol Hill is delayed for weeks
while being screened for anthrax and other biotoxins. It is
preferable to mail the letter, or at least a copy, to the
district office. Five or six phone calls in one day to a district
office on the same subject cause the office to go into crisis
mode. District staff, being unused to this, call the Washington
office to describe a “deluge” of mail and phone calls. Many
groups are using this angle; it seems to work.

Shining Scalpel Awards

At the 2004 meeting, Pittsburgh Post-Gazette
reporter Steve Twedt and AAPS public affairs counsel Kathryn
Serkes were honored with the AAPS Shining Scalpel Award, in
“recognition of outstanding service to Americans in cutting
through the jungle of misinformation to reveal the truth.”

Fighting Malaria

A number of AAPS members have signed onto a letter to
President Bush from Roy Innis, National Chairman of the Congress
of Racial Equality (CORE), on the use of effective measures such
as DDT to fight malaria in Africa. See
www.aapsonline.org/ddt.htm
. More signatories are needed!

AAPS Calendar

Jan. 21, 2005. Board of Directors meeting, Houston, TX.

May 21, 2005. Board of Directors meeting, TBA.

Sept. 21-24, 2005. 62nd annual meeting, Arlington, VA.


Improved Patient Waiver Posted

A simpler, more patient-friendly, more legally thorough
sample patient waiver form is now posted on the Members-Only section.

A member reported that a lawyer for a worker’s compensation
patient called and informed her that the waiver would not stand
up in court. He is already suing the patient’s employer. He was
very rude.

“The waiver has a powerful screening effect,” writes AAPS
General Counsel Andrew Schlafly. “It deters lawsuits much as gun
ownership deters crime. That rude attorney is annoyed by the
waiver because there is a chance that some of it may be upheld in
court. He doesn’t like the fact that patients who sign the waiver
are less likely to sue. He’d rather target doctors who are
defenseless. Moreover, the person who complained is now known to
you as a potential problem. You can discharge him or be more
cautious.”

Mr. Schlafly reports that the only complaints he has heard
about the waivers come from malpractice attorneys.

Mediation Often Prevents Litigation

About one-third of the 36 or so malpractice cases involving
Rush University Medical Center in Chicago each year are mediated.
More than 90% of mediated cases settle, usually within 4 months,
at about 50% of the cost of litigation. Parties communicate
directly, in an atmosphere stressing accommodation and
resolution. Whatever is said is not discoverable and cannot be
used if litigation occurs later (Ocular Surgery News
7/15/04).

Cost of Excess Coverage Rises

Indiana has tort reform, but is still losing obstetricians,
who can’t afford the 72.6% increase in the amount they are forced
to pay into a patient compensation fund to cover awards that
exceed their liability coverage. Indiana recently raised its cap
on economic and noneconomic damages to $1.25 million. Preventing
an increase in the caps is a constant legislative battle in the
various states that have them. And while premiums may be lower in
states like California, they are nonetheless becoming
unaffordable as fees are frozen (AMNews 8/16/04).

Physician Liability Expanded to Non-Patients

Continuing a trend towards expanding physicians’ legal
duties, the Arizona Supreme Court held that physicians have duty
of care in situations in which no traditional patient-physician
relationship exists [Stanley v. McCarver, 2004 Ariz.
LEXIS 71 (2004)]. In this case, a radiologist reading a pre-
employment film did not inform a patient directly of a nodule and
signs of pneumonia. Nor did the employer, in violation of its own
policy. The plaintiff was later found to have lung cancer. The
Supreme Court noted a trend in other jurisdictions and concluded
that public policy is served by imposing a duty, to help prevent
future harm. This decision effectively overturns previous
decisions, such as Hafner v. Beck, which rejected a
malpractice claim against a psychologist who had performed an
independent medical examination. Snell and Wilmer of Phoenix
advises physicians to check their liability policies for coverage
of such claims, and to consider allocating responsibility for
informing patients in contracts with third parties.

Dr. Sell Denied Trial; Tapes Show Abuse

The trial of Charles Thomas Sell, D.D.S., scheduled to begin
Nov. 29, was cancelled, and he was once again sent to a
government psychiatrist for the apparent purpose of declaring him
incompetent. He is said to be too focused on mistreatment
experienced in the prison hospital to be able to concentrate on
his legal defense. According to a report by his defense
psychiatrist, the sealed videotapes do indeed show the very abuse
that he alleged, such as being forcefully sprayed with scalding
water. Dr. Sell has now been imprisoned for nearly 8 years
without trial (AAPS News August
2004
; News of the Day Archive
11/25/04
, www.aapsonline.org).

You Are Responsible for Consultants

Following a consultant’s advice on compliance with federal
rules does not protect a physician against liability if the
information is false. Before hiring a consultant, check his
credentials, the OIG exclusion list, and the experience of
colleagues. Beware of consultants who offer to work for a
percentage of increased payments. Verify advice with an
independent source before acting upon it (MCA 22/33/04).

Medicare Carrier Sued

A Florida medical billing company, targeted in a False
Claims Act lawsuit for billing for $122 million worth of durable
medical equipment, filed a complaint against Palmetto GBA for
failing to detect the fraud. Incredibly, 1,200 Medicare
beneficiaries had filed complaints against DME companies, stating
that they had never received any supplies, and the majority of
the companies were fictitious. Nevertheless, the carrier kept
paying the bills (BNA’s HCFR 11/10/04).

OIG to Investigate HIPAA Compliance

While the Office of Civil Rights has carried on a passive,
complaint-driven HIPAA enforcement process, the new Work Plan for
the HHS Office of Inspector General includes internal uses,
disclosures, and amendments of health data. OIG “can go wherever
it wants,” and “OIG will almost certainly find inadequate
documentation wherever it looks,” says attorney Mark Lutes
(HIPAA Compliance Alert 11/8/04). The 2005 OIG Work
Plan, posted at

oig.hhs.gov/publications/workplan.html
, specifically
refers to “HIPAA covered entities.”

Charity, Kickbacks, or Inducements?

Medicare does not force hospitals to seize the homes of
patients with bad debts (

www.cms.hhs.gov/FAQ_Uninsured.pdf
); however, there are
rules for non-opted-out physicians and facilities to follow to be
sure that charitable allowances do not fall into a forbidden
category. There must be consistent standards for granting a
waiver of copayments, and one designated person with authority to
grant a waiver. Patients must provide information such as tax
returns, check stubs, and employment status. Documentation of
need must be maintained, and continuing qualification must be
verified (laminated checklist from Medicare Compliance
Alert
; for federal poverty guidelines see

aspe.os.dhhs.gov/poverty/03poverty.htm
). Note that
pursuit of anti-kickback violations is a part of the 2005 OIG
Work Plan.


Correspondence

EMRs Not Good Medicine. Although electronic medical
records are often touted as the digital magic that will improve
quality and reduce medical errors, my own experience completely
contradicts this theory. I am often asked to review records of
various physicians and hospitals across the nation. I can always
tell which ones were generated by an EMR system. These are
unquestionably the worst records for efficiently conveying
accurate, clinically relevant information.

The standardized nature of EMRs is clearly centered on the
payment system. The primary purpose of the standardized wording,
paragraphs, and bullet points is to show that the service
qualifies for a specific CPT code. EMRs have degenerated to the
point that the printouts tend to resemble standardized nursing
care plans rather than accurate physician progress notes. One
wonders how much of what was recorded was actually done. Often,
the EMR system-generated notes totally contradict “comments” in
the very same progress note!

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

The Trouble with “Best Practices.” We don’t mass
produce people, and what works best for me may not work for my
elderly Aunt Mary who drinks. Moreover, in a mass production
setting such as the one envisioned by Newt Gingrich, you merely
discard the widgets that don’t exactly fit the production model.
Need examples? Study the “eugenics movement” of the 1930s or the
“healthcare system” of the Nazis.

Stephen R. Katz, M.D., Fairfield, CT

Computer-Generated Advice. Computers do very well for
narrow tasks like calculating electrolyte replacement. But when
carriers use prescription data to infer diagnoses and “offer
suggestions” for “best practices,” I find reviewing myself
records, only to discover either that I was already doing what
was suggested, or it was inappropriate under the circumstances.

Data collection with feedback loops involving physicians was
formerly called clinical research; grant funds covered the costs.
The delusion has developed that this is a normal aspect of
practice that doctors should subsidize. Still more delusional is
the idea that it will “help” the physician do his job.

Philip Alper, M.D., Burlingame, CA

Who Decides “Best Practices”? I fail to see how endless
committee meetings that debate best practices will disseminate
information about clinical advances any faster than the current
system of journals, specialist referrals, and professional
meetings. In behavioral areas, best practices seem to reflect a
committee wish list for social change. If they become a safe
harbor for protection against professional liability, innovations
will be politicized and scrutinized for Medicare/Medicaid “cost-
effectiveness” and the message that they send to the benighted
population. Physicians will become another arm of the politically
correct establishment.

Linda Gorman, Independence Institute

EMRs Not a Panacea. Politicos and other members of the
chattering classes seem to think that all physicians need is more
information. If I don’t already know something about a patient
with a chronic illness, I know where in the chart to find it. If
I refer a patient, I give the receiving physician a distillation
of relevant information. For physicians in mid-career, much of
diagnosis is intuitive, from information gleaned from looking at
the patient, not a computer screen. Newt needs to coat-tail a
physician who has not been squeezed into a bureaucratic ball.

Robert Berry, M.D., Greeneville, TN

On Government “Mental Health Screening.” Psychiatry has
been taken over by the drug companies, as Dr. Leon Mosher pointed
out in his resignation from the American Psychiatric Association.
The new screening multiplies the danger, as “experts” are
entrusted with “diagnosing” allegedly mysterious and dangerous
“disorders” that are invisible to the rest of us.

However we define “mental illness” and the definitions vary
wildly and unscientifically careful, painstaking examination is
required to diagnose it. The notion that brief “screenings” can
uncover it resurrects the medieval witchhunt, which used spots
on people’s skin to “diagnose” those who were “compacting with
the Devil.”

Nathaniel S. Lehrman, M.D., Roslyn, NY

A Definition of Case Management: Pseudo-trained semi-
professionals apply subjective interpretation to a mixture of
subjective and objective data retrospectively, without first-
person assessment, then quantify and qualify such data to
delineate the appropriate response to the physician in charge of
the patient’s care. Their recommendation approximates the
appropriate therapy for the average patient reviewed. It may be
challenged by the physician, providing that he can provide an
objective, well-referenced argument to justify his view.

Vern Cherewatenko, M.D., Renton, WA

A Definition of Politics: As Mark Twain wrote:
“Politics is the art of looking for trouble, finding it
everywhere, diagnosing it incorrectly, and applying the wrong
remedies.”

Steve Barchet, M.D., Issaquah, WA

* * *

“In our time, political speech and writing are largely
the defense of the indefensible.”


George Orwell, “Politics and the English Language”


Legislative Alert

Bush Takes Command

In the field of medical policy if only because of the
enactment of the Medicare Modernization Act of 2003 President
George W. Bush may prove to be the most consequential President
since Lyndon B. Johnson.

While conservatives are properly unhappy over the largest
entitlement expansion since the Great Society the Medicare drug
benefit they also recognize that Bush has laid the groundwork
for a transformation of the health insurance market with the
health savings accounts (HSAs).

Outside of his legislative initiatives, Bush has also opened
or expanded rural and community health centers, granted waivers
to states to use Medicaid and SCHIP funds to pursue innovative
health coverage options for low-income families, and implemented
new HHS rules to lower prescription drug costs. Beyond these
administrative changes, the Bush Administration produced a very
impressive report on the state of competition in the medical
sector, the work of staffers at the Department of Justice and the
Federal Trade Commission. The conclusion: American medicine is in
desperate need of more competition.

The White House has outlined an ambitious second-term
agenda: Further expand HSAs, including a tax credit to help small
business employees; a new above-the-line deduction for health
insurance premiums for high-deductible health plans; a proposal
to allow small businesses to establish association health plans
and to expand association health plans to individual membership;
and a proposal to allow individuals and families to buy
affordable medical coverage across state lines.

The White House has also said that it will press for further
expansion of community health centers, the promotion of health
information technology, the enactment of medical liability reform
on the federal level, a new tax deduction for long-term care
insurance, and additional tax exemptions for home caregivers who
take care of aging family members.

Tax Reform

Bush has already announced that aside from Social
Security reform and medical liability reform, he wants to preside
over a massive overhaul of the federal tax code. This is Really
Big Stuff. Depending on what form his tax reform proposals take,
the Bush tax reform initiative would almost certainly have a
profound impact on American medicine.

Thus far, the White House has been speaking in generalities
on this topic, but has said that the agenda is to keep taxes low
while reforming the entire system. This means making the tax cuts
enacted in 2001 permanent, and making the tax code itself
“fairer, simpler and pro-growth.” Does this mean that Bush is
going to come out and support a repeal of the existing income tax
in favor of some sort of a flat tax proposal? Some form of
consumption tax or value-added tax? What will be the fate of the
existing panoply of personal and business tax credits,
deductions, and tax exclusions, including business deductibility
for health insurance and employee tax exclusions on health
insurance benefits?

Tax policy generates a huge lobbying industry. Washington is
swimming in tax lawyers and lobbyists. They have a huge stake in
the current system. You can expect them to line up to fight any
serious tax reform.

The key player in this tax reform debate will be the strong-
willed Bill Thomas (R-CA), Chairman of the House Ways and Means
Committee. In public speeches and commentaries on the topic,
Thomas has already advocated a major tax overhaul of the
treatment of health insurance, and has said that he would like to
see the current tax breaks for employment-based health insurance
approximately $188 billion in 2004 replaced with a new
system of individual tax relief for health insurance, including
the purchase of HSAs. Rep. Jim McCrery (R-LA), another recognized
expert on health policy and a regular ally of Thomas, is another
champion of this bold approach.

Remarkably, the idea of ending the current tax treatment of
medical care is getting favorable play in unexpected corners.
Sebastian Mallaby writes: “But tax sheltered corporate health
care is unfair and wasteful. People at small companies and
temporary and unskilled workers often get no coverage. Meanwhile,
privileged workers get coverage that is overly fancy because it
is subsidized by taxpayers and doubly wasteful because it
separates the decision to spend money from the responsibility for
paying. So long as the bill is on the company, the doctors and
patients who make medical choices have no incentive to constrain
spending” (Wash Post 11/22/04). Exactly.

The idea of a universal tax credit is certainly
compatible at least in the general policy direction with the
more limited Bush initiatives of a refundable tax credit for low-
income folks without employer-based coverage. The Bush proposals
are modest in size, roughly $90 billion over ten years to cover
the uninsured. Urban Institute analysts Jack Hadley and John
Holohan, however, estimate that taxpayers already pay out in
2004 dollars $40.7 billion for the uninsured, one way or
another, and that the public funding for that care amounts to
$34.6 billion, meaning that 85% of the costs of the uninsured are
already paid through some form of government funding. But the big
political question is whether Congress and the White House will
go that far. It would be a big step.

Another very real possibility is that President Bush, Rep.
Thomas, and other Congressional tax reformers might put a cap on
the tax exclusion of employer-based health benefits at some
level, generating new revenues that could help to finance a more
aggressive and expansive tax-credit system. Individual tax relief
for medical care is the structural component of a new system of
individual choice, and individual choice forces robust
competition among insurers, doctors, and other medical
professionals. A combination of tax reform and Bush’s various
initiatives could produce a very new and different world. A
better world for doctors and patients alike.

Meanwhile, Back to Medicare Central Planning

For the New Year, the Bush Administration is going to
unveil the long awaited prescription drug regulations to
implement the new Part D of the Medicare program, the Medicare
Prescription Drug Program. The entitlement is to go into effect
in 2006; the regulations are expected in 2005.

This is going to be a difficult business. The reasons are
not hard to fathom. Congress designed the Medicare drug benefit.
It does not reflect current market realities; it simply displaces
them. According to a recent study conducted by Pricewater-

houseCoopers for the American Association of Retired Persons
(AARP), of the projected $407 billion in the new Medicare law
over the period 2006-2013, only $70 billion represents new
spending that would not have occurred without enactment of the
Medicare Modernization Act. The rest $337 billion is simply a
replacement of current federal spending.

For all of the Congressional rhetoric about the drug benefit
being delivered by private-sector entities, the iron law of
government control will be enforced sooner or later: with
increased government spending, one gets increased government
control. For the champions of market-based reform, this massive
shift in spending, enacted by a Republican Congress, is a huge
policy defeat.

Congressional designs will invite further problems. Under
the new Part D, Medicare enrollees will get a government
standardized prescription drug benefit. In 2006, after paying an
estimated $35 per month premium (estimated to represent 25% of
the cost of the benefit) plus a $250 deductible, the government
will pay 75% of drug costs between $250 and an initial coverage
limit of $2,250. Between $2,250 and $5,100, Medicare
beneficiaries will pay 100% of their drug costs the infamous
“doughnut hole.” Above the catastrophic limit of $5,100,
beneficiaries will be required to pay 5% while the taxpayers pay
95%. The premium, deductible, and catastrophic limit will
increase over time, reflecting changing costs. For example, by
2013, CBO estimates that the deductible will be $445, the initial
benefit limit will be $4,000, and the out-of-pocket threshold
will go up to $6,400. The new law provides, however, for
generous subsidies to low-income beneficiaries.

The Congressional Budget Office (CBO) expects that 87% of
Medicare beneficiaries will enroll in the program through new
Prescription Drug Plans (PDPs), the new Medicare Advantage Plans,
or through retiree plans that are qualified to offer the coverage
under the new law.

The “doughnut hole” will be a new experience for Medicare
beneficiaries. There has never been anything like it marketed to
normal human beings in the private sector; so the Congressional
drug benefit has no track record that the Medicare bureaucracy
can look to in the process of making this thing work. We do know,
however, that the Medicare bureaucracy will have to track the
out-of-pocket costs of every beneficiary to determine when the
total out-of-pocket maximum of $3,600 is reached. This will be an
enormous task.

All good critics of the Medicare bureaucracy should take
note: if this does not proceed smoothly, you cannot blame the
team at the Centers for Medicare and Medicaid Services (CMS).
Congress designed this thing, and Congress deserves a copy of
every complaint sent to the CMS over the next few months.

How would the drug benefit impact beneficiaries? Different
analyses show that the impact will be mixed. Recall, again that
most Medicare beneficiaries, roughly three out of four, today
have some form of drug coverage, either through private
employers, Medigap or private supplemental insurance plans, or
other government programs such as Medicaid. CBO estimates that in
2006, the average per capita drug spending among Medicare
enrollees will be about $3,155, while more than half will have
drug spending of less than $2,000 and about 20% will have
spending of more than $5,000.

Again, with a combination of new subsidies and coverage,
Medicare enrollees will do better on average than they would be
doing in the absence of the drug benefit in 2006. Specifically,
according to the PwC analysis, in 2006 the new Medicare drug
benefit would reduce the average annual out-of-pocket per- capita
drug expenses from $1,325 to $890.

Low-income Medicare enrollees will be big
winners.
Medicare enrollees getting government subsidies
for drug benefit are expected to spendout of pocket83% less on drugs than they would have absent the enactment
of the new Medicare law, according to a recent study by the
Kaiser Family Foundation.

Medicare enrollees with employer-sponsored drug
coverage will be losers
. About 11.8 million
beneficiaries have such coverage, and according to PwC analysis,
the amount of drug costs paid by insurance will drop from 71% to
67%. Employers will have the option of keeping their employee
coverage and getting an extra federal subsidy on spending that is
actuarially equivalent to the government benefit; they could
supplement the Medicare drug benefit; or they could drop it
altogether. According to the PwC analysts, the enactment of the
drug entitlement is an additional reason for many employers to
drop their coverage: “The retirement of the baby boom generation
will put significant stress on retiree health plans, which will
cause general coverage to drop over the long term.” CBO expects
that roughly 23% of retirees with company coverage will be moved
into the government drug program in 2006.

Another Look at Health Spending

You keep hearing that we are spending too much on
medical care; and maybe we are. But what you don’t hear often
enough is what we are getting in return for our money. A report
on the subject, The Value of Investment in Health Care, released
by MedTap International, examines health spending from 1980-2000
and concludes that over that 20-year period, for every dollar
spent there have been health gains valued at between $2.40 to
$3.00. Over that time period, annual death rates declined 16%;
overall life expectancy increased by 4%; disability among seniors
declined by 25%; hospitalization days declined by 56%; and
mortality from heart attacks was cut in half.

Imagine the productivity gains that could result from the
application of free-market reforms to the creaky health care
financing arrangements!

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

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