AAPS News – July 2003


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Volume 59, No. 7 July 2003


A train wreck was the PowerPoint illustration for the HIPAA
transaction code sets (TCS) rule at the recent AAPS practice
management seminar in Seattle.

On Oct. 16, HIPAA will throw an electronic switch to convert
to the new system in what Tom Gilligan of the Assn for Electronic
Health Care Transactions calls the “largest single computer
conversion ever” (HIPAA Compliance Alert 5/03).

The April 16 testing deadline has passed, and payers are not
even ready to test. Hundreds of millions of lines of COBOL code
are still being run, and very few programmers can make the needed
alterations. Yet retrofitting is necessary because of the
tremendous cost of replacing all the systems.

But even if all the components are tested, how will the
system work as a whole? It’s like “testing the components of an
airplane without testing whether the plane can fly,” said Dr. Joe
Nichols, chief information officer for Paladin Systems (Puget
Sound Business Journal
, 3/28/03).

It’s not a simple matter of changing two-digit years to
four-digits as for Y2K. New and additional fields and codes have
been introduced. One of four possible codes will have to be
translated into one of 24 and back again.

According to industry experts at the May 20 meeting of the
National Committee on Vital and Health Statistics (NCVHS), only
40 to 60% of covered entities will be ready. Massive disruptions
are expected if even 5% are noncompliant.

Despite the problems, the Center for Medicare and Medicaid
Services (CMS) has stated firmly that there will be no further
extensions. Anyone who accepts or uses noncompliant transactions
after the deadline will be in violation of the law. Noncompliant
electronic claims will be rejected. One piece of missing data on
one claim will result in a whole batch being rejected. It’s a
“sledgehammer approach,” stated Jack Joseph of
PriceWaterhouseCoopers at the AAPS meeting.

According to the California Medical Association, practices
that can’t find a clearinghouse to accept their software output
and translate it to the proper format have three options: get a
new billing service; buy and install new software; or revert to
paper for non-Medicare payers. Medicare may be billed using free
electronic software from


Massive reversion to paper, because of inability to submit
electronically, is the payers’ worst nightmare. The system could
rapidly be clogged, with disastrous consequences for hospitals
and practices that cannot weather a break in cash flow.

“The end of the world is when cash flow interruptions
disrupt patient care,” a spokesman for the American Hospital
Association (AHA) told the NCVHS.

“There is little doubt that the financial viability of the
provider side of the … system is at risk,” Dr. Nichols said.
“We think there’s a very definite potential explosion coming down
the pike,” said Bob Perna, medical economics director for the
Washington State Medical Assn (Puget Sound Bsns J, op.

Of 223 physicians responding to a recent AAPS survey on
HIPAA, 63% report being noncovered entities. While these
physicians do not have to comply with any of the HIPAA
administrative simplification rules (privacy, TCS, or security),
they could still be affected by the train wreck if they file any
type of insurance claims.

The only reliable source of revenue after October 15 will
probably be patients who pay at the time of service. If these
patients file their own claims, or have Medicare claims filed by
nonparticipating physicians, they will probably see some delays
in reimbursement. However, as Mr. Joseph pointed out, insurers
give first priority to patients who file paper claims.

October 16 may be the proverbial crisis and opportunity. If
the third-party system becomes completely snarled by impossible
government barriers, more people will ask why payment for
noncatastrophic medical services should be funneled through an
insurer in the first place. And why should the insurer
ever stand between the patient and a medical

Physicians are already making the transition. As one AAPS
survey respondent commented, “We phased in paper claims over a
few months no problem! We also went non par with Medicare even
better!” [Additional comments are posted at

The trends of half a century will need to be reversed to
return to direct patient payment. An entitlement mentality is
ingrained in patients, and many physicians have forgotten how to
accept cash payment. Some even reject cash-paying patients,
assuming that they are uninsured deadbeats although 33% of the
uninsured have household incomes more than $50,000 per year (NCPA
Brief Analysis #379, 11/15/01) and are willing and able to pay a
reasonable price for care.

Hospitals are the greatest obstacle to true reform. Their
computer systems are designed around coding, authorizations,
third-party contracts, and “discount” fee schedules. Unlike
economically viable businesses, hospitals are unable to determine
charges immediately when a customer asks for them. Many refuse to
negotiate with patients (see p. 2).

Lest we forget, the purpose of “administrative
simplification,” a key feature of the Clintons’ Health Plan, was
to serve as the information infrastructure of nationalized
medicine. In a Discussion Paper found in Box 1469 of the Task
Force documents, its purported advantages were to help offset
providers’ resistance to price controls and global budgeting. But
its unintended consequences could thwart the whole scheme.

A critical mass of physicians returning to direct payment
could avert a HIPAA-caused shutdown of medical facilities while
restoring an honest price system and derailing the government
command-and-control train.

Why Won’t Hospitals Post Reasonable Prices?

Logically, it would seem that patients who promptly pay
cash, unencumbered by third-party hassles and overhead, would be
sought and courted by hospitals. Instead, uninsured patients may
be charged three to five times (or more) what the hospital would
receive from Medicare or private insurers for the same
service and have their wages garnished and liens placed on their
homes if they can’t pay (Denver Post 2/18/03). Why?

One reason could be the loophole that hospitals may use to
maintain revenue despite the DRG price controls, highlighted in
the fraud investigation of Tenet Healthcare: outlier payments.
Congress created this mechanism to protect hospitals from being
bankrupted by unusually costly patient stays. The average
percentage of outlier patients increased from 2.66% in 1996 to
3.5% in 1999, with Tenet’s increasing to 10%. The outlier
payments are pegged to retail prices. More than half of a
hospital’s Medicare income may be from this source which also may
help compensate for HMO underpayments.

Overcoming Barriers to Cash Payment

The principal barriers are: (1) the tax code; (2) the
complexity and restrictions of mechanisms available to gain a tax
advantage (Gerry Smedinghoff points out that an Medical Savings
Account brochure may be too much like the manual for programming
your VCR); (3) a system structured in a manner analogous to the
Gulag Archipelago, in which decent people [doctors, hospitals] thrown into a population of hard-core criminals [certain third
parties] were compelled to exploit anyone weaker than they [the
uninsured] simply to survive.

We can’t wait for Congress. A critical mass of patients and
physicians is needed now to form the nucleus of a civil
society based on cooperation and mutually advantageous transac-

tions instead of zero-sum games. Potential rewards are great
because of the enormous diseconomies of scale in today’s
system : the $20 copayment costs most Americans much more over a
year than direct payment and high-deductible insurance.

“Universal care” [socialist] demonstration projects, such as
the Integrated Delivery System of the Chautauqua County Health
Network in Jamestown, NY, called to our attention by James
Dahlie, M.D., proliferate. More free-market demonstrations are
needed. Each AAPS meeting features physicians who have opted out
of the third-party System to care directly for patients. [A CD
from the 2002 spring meeting and audiotapes from other meetings
are available call (800) 635-1196.]

Speaking on this subject at the 60th annual meeting are
internist/emergency medicine physician Robert Berry, M.D., of
Greeneville, TN; internist H. Todd Coulter, M.D., of Ocean
Springs, MS; urologist Michael Harris, M.D., of Traverse City,
MI; and neurosurgeon Tim Kriss, M.D., of Versailles, KY.

There is no stronger incentive for jumping off the train
than an impending crash.

Pay Cash in Britain

Some prices advertised up front by a British hospital:

  • Hip replacement: $9,400 – $12,300
  • Cataract removal: $3,000 – $4,200
  • Hernia repair: $2,200 – $2,900

No managed-care authorizations required! Uninsured
patients are welcome. You can usually obtain a fixed-price
estimate in advance. See

Nominating and Resolutions Committee Reports

The Nominating Committee chaired by Claud A. Boyd, Jr.,
M.D., of Augusta, GA, presents this slate:

President-Elect: James Pendleton, M.D., Bryn
Athyn, PA

Secretary: Charles McDowell, Jr., M.D., Alpharetta, GA

Treasurer: R. Lowell Campbell, M.D., Corsicana, TX

Board of Directors: Drs. Curtis Caine of Brandon, MS;
Kenneth Christman of Dayton, OH; James Coy of Punta Gorda, FL;
John Dwyer of Chicago, IL; Robert Gervais of Mesa, AZ; Lawrence
Huntoon of Jamestown, NY; and Robert McQueeney of Marinette,

Nominations can be made from the floor. Members interested
in serving should sit in at a board meeting and make their wishes
known. All officers and directors serve at their own expense.

To be considered at the Point Clear meeting, resolutions
must be submitted by August 17: call (800) 635-1196.

From the Clinton Task Force Archives

“CBO believes that only if global budgets and expenditure
caps are strictly applied and if no other source of financing
is available to the providers
will they be successful in
controlling costs. Other observers suggest that global budgeting
would give the government needed control over the diffusion of
high technology and over growth in service volume in health care.
It has also been suggested that the administrative simplification
of dealing with a single-setter (the government) would be a
sufficient advantage to providers as to offset their basic
resistance to price controls. … Many individual physicians are
taking issue with the inference that the quality of their
services is driven by the price….” (Discussion Paper on Managed
Competition, 12/3/92, National Archives II, Box #1469).

[Documents retrieved in AAPS v. Clinton are posted at
www.aapsonline.org: click on Clinton Taskforce Records.]

Socialism and Public Health: SARS

The third highest SARS death rate in the world, after China
and Singapore, is in Canada. In rural China, SARS got its start
through the population’s close contact with farm animals. “Only
in Canada,” writes Mark Steyn, “does the virus owe its grip to
the active cooperation of the medical profession.” Lambasting
perfunctory treatment from chronically harassed staff in
overcrowded emergency rooms, Steyn concludes: “The system
infected us” (National Post 4/24/03).

AAPS Calendar

Sept. 17. Board of Directors mtg, Point Clear, Alabama.

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

Oct. 13-16, 2004. 61st annual mtg, Portland, Oregon.

HIPAA Litigation Update

The AAPS constitutional challenge to the HIPAA Privacy Rule
was argued on May 8 before Judges Emilio Garza, John Duh‚, and
Harold Moss of the Fifth Circuit Court in New Orleans by AAPS
General Counsel Andrew Schlafly.

AAPS cited the Supreme Court case Whelan v. Roe, in
which a medical association was found to have standing to
challenge a state law requiring submission of information on
prescriptions for controlled substances to a state data base.
Although the law was upheld, discovery showed extensive
safeguards to prevent misuse of the information: it was stored in
a vault for five years and then destroyed; data were encrypted,
and the computer was run off-line; and only seven employees and
24 investigators had access. AAPS asked that the case be remanded
for discovery concerning the adequacy of safeguards for data
released under HIPAA.

The U.S. attorney argued that the only new obligatory access
by government to patient data was to determine compliance with
the HIPAA Privacy Rule.

The Court issued a one-word opinion: “Affirmed,” and
directed that the decision not be published or used as precedent.

“It is another loss for patients and those subject to
HIPAA,” stated Mr. Schlafly. “It means individuals cannot sue
until they first suffer injuries from privacy invasions, which
could have been avoided.”

The “country doctor exception” was established by this case
in the lower court.

The lower court’s decision dismissing the HIPAA case brought
by the South Carolina Medical Association et al. was also
affirmed by the Fourth Circuit. The Court found that expanding
the scope of the Privacy Rule to cover all forms of health
information is “reasonably related to the larger purposes of
HIPAA,” as limiting coverage to electronic data would constitute
a perverse incentive for covered entities to avoid
computerization and thereby “utterly frustrate the purpose of
HIPAA.” Additionally, the Court found that the Rule was not
impermissibly vague.

On April 10, Citizens for Health v. HHS was filed
in Philadelphia by a coalition of consumers and medical
practitioners, including the American Psychoanalytic Association
), arguing that HIPAA
gives “regulatory permission” for vastly expanded access to
sensitive information. If the suit is successful, the Bush
Administration rule would be replaced by the Clinton/ Shalala
rule, which required patients to sign “consent” for any use or
disclosure of their information.

“Because patients basically could not receive treatment
unless they signed the so-called consent form, this change would
increase barriers to care while providing no meaningful
protection to patients,” stated AAPS Executive Director Jane
Orient, M.D. “What we need is a repeal of the Privacy Rule, as
proposed by Dr. Ron Paul (R-TX) in H.R. 1699. Doctors should urge
their Congressman to cosponsor this legislation.” [Dr. Paul’s
statement is posted on www.aapsonline.org.]

Aetna Offers Settlement

In one of the largest lawsuits ever in the medical field,
Aetna broke rank with nine other insurers to offer a settlement.
Almost all the 700,000 practicing physicians in the country are
to share $100 million (about $150 each), and all 12 or so lawyers
will share $50 million in legal fees. A newly created foundation
will get $20 million to “improve health care” by reducing medical
errors, childhood obesity, and racial disparities. The AMA gets
general acceptance of its treatment guidelines, and physicians
will be allowed to have input on how claims-processing software
evaluates reimbursements, along with access to a Billing Dispute
External Review Board and the elimination of some fee cuts that
might otherwise have been made (Wall St J 5/22/03).

AAPS Joins Amicus Brief Supporting Privacy

With the American Psychiatric Society and other groups,
filed an amicus brief in
the case of Harold I. Eist, M.D., v. Maryland State Board of
Quality Assurance
(civil case no. 240300). The issue
concerns whether a state licensure board can sanction a
psychiatrist for defending the therapist-patient privilege and
insisting that patients have an opportunity to protect their
privacy prior to disclosure of records to the state.

Dr. Phillips Allowed to Withdraw Plea

In an extraordinary ruling, the Nevada Supreme Court agreed
with AAPS in permitting Dr. Mitchel Phillips to withdraw a plea
of nolo contendere: “It would be manifestly unjust not to allow
Dr. Phillips to withdraw his plea in light of the unforeseen
consequences suffered as a result of that plea.” AAPS filed an
amicus brief in favor of Dr. Phillips, which was hotly opposed by
the State of Nevada (see AAPS News, April 2002).

Tip of the Month: In fraud prosecutions under HIPAA,
18 USC 1347, a N.Y. court established this requirement of intent:
“Because an essential element … is intent to defraud, it
follows that good faith on the part of the defendant is a
complete defense to the charge of healthcare fraud. A defendant,
however, has no burden to establish a defense of good faith. The
burden is on the government to prove fraudulent intent and the
consequent lack of good faith beyond a reasonable doubt. Under
the healthcare fraud statute even false representations or
statements, or omissions of material facts, do not amount to
healthcare fraud unless done with fraudulent intent.” U.S. v
, 2002 WL 31453094 (S.D.N.Y. 10/31/02).

Even Experts Disagree on Coding

In a recent study reported in the Annals of Emergency
, patient records were sent to four different agencies
specializing in Medicare coding, and five different experts
working in the same coding shop. For the five E&M codes that
cover 70% of emergency visits, coders all agreed in only 15% of
cases. In 29%, the codes differed by more than two coding
levels a range of disagreement much larger than that used to
extract a $10 million fraud settlement from the University of
Chicago (Wall St J 11/20/02).

“[N]othing is more effective in persuading the masses to
stop cooperating with the government than the constant and
relentless exposure, desanctification, and ridicule of government
and its representatives as moral and economic frauds and
imposters: as emperors without clothes subject to contempt and
the butt of all jokes.”

Hoppe H-H. Democracy: the God That Failed


What HIPAA Really Means. I was just about to throw away
the AM News of April 7, when I read the article from the
“HIPAA Minute” series. The lead sentence is: “Give it up for the
public good protected health information that is.” Later it says
that “…doctors can share patients’ health information with
employers. The physician has to be working for or on behalf of
the company as part of a worker-safety program mandated by
federal agency or state law.” I guess that pretty much tells it
like it is. The doctor works for whoever pays him. I wonder what
employees think about this open chart policy. I wonder whether
they even know.

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

Doctors Know What to Charge. To those who claim that
physicians’ fees are very complex because they charge for
thousands of different services, such as 40 different types of
wound closure, I say baloney. That’s what happens when people who
don’t belong between patients and physicians (such as government,
insurers, and MCOs) insinuate themselves between the two. They
claim to “systematize and bring objectivity and uniformity,” but
all they do is muck things up so they can charge fancy and
unnecessary middleman fees.

I always had a fee schedule in my Ob/Gyn office. When
patients complained that it didn’t “conform” to the insurer’s
codes, I told them that was between them and their
insurance company: I knew what service I had rendered,
and the skill and intellect involved, whereas the insurance clerk
did not.

If doctors started to post their standard fees, and took a
few minutes to explain to an occasional patient why they were
being charged more (say for a procedure done at 3 a.m. 40 miles
from my home), there would be no problem between doctor and
patient. But the code-makers and others who thrive on the system
would soon feel the heat as patients recognized what an
interposed nuisance they are. Then you would rapidly see demands
to keep “insurance” and government out of day-to-day medical
transactions and retreat to true insurance: occasional coverage
of the rare and expensive occurrence.

Stephen Katz, M.D., Fairfield, CT

Get Out Now. Managed care is on its last legs, and the
last one out will be left holding a mountain of unpaid claims.

We signed up for one HMO 10 years ago. We paid no attention
to them until they asked for 20 patient records, had “expert
coders” look at them, decided we charged too much, extrapolated,
and demanded money back. They left us no phone number to call.
That was the last straw. How silly we were to join in the first
place! When we wrote our letter of resignation, we got a call
begging us to reconsider: that was the first human being who
would speak to us. I told them no way. We have not sent them a
dime and await a written answer.

We calculated that if half of their patients chose to stay
with us and go out of network, we would be ahead. And the
patients, who would be reimbursed 80% of our usual fee after
meeting their deductible, would be actually be better off than
with their former copayment.

Alieta Eck, M.D., Somerset, NJ

PIFATOS Works. We have been taking payment
in full at time of
service since SimpleCare began 4 years ago. Collecting
has not been a problem. People are happy to pay a fair
price for a service. White and blue-collar patients are equally
delighted to learn about high-deductible insurance plans. Many
were never told of the availability of such plans when they
called their broker or insurance company.

Physicians who learn the financial logic of PIFATOS are
seeing an increase in their cash-based practice and a much
happier group of patients.

What doesn’t work is giving a “discount” from a
CPT-coded visit for cash payment; this can potentially be a
breach of contract with some insurance companies.

Vern Cherewatenko, M.D., Renton, WA

Give Them a Price. At first, I described Patmos Clinic
as offering “affordable, quality care through payment at the time
of service.” People did not know what that meant. After
researching the Tennessee Medical Board’s policy on advertising
prices and finding that it was acceptable, I began listing my
fees. My patient volume increased as a result.

I charge the fees that I post. Those who think my fees are
too high (although less than the local veterinarian’s fees thus
demonstrating Americans’ entitlement mentality and the value they
place on their own health) are invited to consider seeking care
elsewhere the next time they need medical services. Typically,
other local physicians and urgent care centers charge twice as
much, and the wait is longer.

Some patients are hard to please; if they choose not to
become part of your practice, will you be very unhappy?

Robert Berry, M.D., Greeneville, TN

Why More Insurance Is Less. People can control their
own routine costs by changing their utilization patterns.
However, most employees are offered a single medical insurance
product with extensive first-dollar coverage, take it or leave
it. This being the most expensive type of coverage, more people
and businesses are going uninsured. In an attempt to wipe out
financial barriers to day-to-day care, we are driving most of the
most vulnerable out of the insurance pool altogether.

James Knight, M.D., San Diego, CA

Legislative Alert

Medicare Debate Enters a Dangerous Phase

Here’s something different. The latest news on Capitol Hill
is that the Senate, not the House, is likely to go first in
enacting “comprehensive” Medicare reform legislation. Majority
Leader Bill Frist is driving for action by July 4, and the Senate
Finance Committee is now working feverishly on the language of a

The latest word is that the Senate bill would incorporate
key elements of the so-called “Tripartisan Plan” that was
developed last year by Senate Finance Committee Chairman Charles
Grassley (R-IA), Sen. John Breaux (D-LA), and Sen. James Jeffords
(I-VT). Under that approach, Medicare beneficiaries would be
required to pay a $250 deductible for drug coverage and half of
all drug costs between $250 and $3,450. As with last year’s House
Ways and Means bill, there would be a “donut hole” between $3,450
and $3,700, and then the federal government i.e. the
taxpayers would pay all of the costs. (This is a profoundly bad
idea, of course.) Last year, the Congressional Budget Office
(CBO) estimated that the costs of the bill’s drug provisions at
$340 billion over ten years.

The Tripartisan language would introduce competitive
elements into the Medicare program, establish a new fee-for-
service option, establish a catastrophic coverage limit of $6,000
a year, and add preventive services.

Senator Grassley has been at loggerheads with Representative
Bill Thomas (R-CA), chairman of the House Ways and Means
Committee, over tax policy. Moreover, Grassley is committed to
increasing Medicare payment for doctors and hospitals in rural
areas, and is concerned about the ability of private health plans
to deliver the goods in rural areas. HMOs, for example, are
notoriously absent in rural areas, because population density is
not high enough to sustain a viable HMO market. Grassley is also
at odds with the White House over the value of the drug benefits.
The White House Plan calls for a less robust prescription drug
benefit in traditional Medicare and a more robust prescription
drug benefit in the new Enhanced Medicare a new system of private
competing health plans, with the intention of enticing seniors to
join the new system. Grassley’s position is to guarantee equal
levels of drug coverage in traditional Medicare and private
health plans, and allow seniors to choose which option they want
on a level playing field.

In the Senate, there is another political problem needing
careful calculation. Grassley runs into serious trouble with
conservative Republicans if the Senate Finance Committee bill
ends up being the proverbial Nothing Burger: more spending for
doctors and hospitals and other medical professionals, additional
Medicare drug spending, and little in the way of serious
structural reform.

How will the Left react to a serious Medicare proposal if
(indeed, a big if), the Senate Finance Committee should actually
produce such a bill? A serious Medicare reform proposal would, we
repeat, maximize freedom of patient choice of plans and benefits,
and also maximize free-market competition among plans and medical
professionals. As Ron Pollock, Executive Director of the Families
USA, a grassroots group lobbying for even more government control
of medicine, recently told The New York Times, any
significant step toward “privatization” of Medicare is likely to
invite a Democratic filibuster. It would require 60 votes to
overcome such an obstacle on the Senate floor. Meanwhile, the
Senate Democrats have not promoted any comprehensive Medicare
bill of their own. This is puzzling unless the entire Senate
Democratic agenda would be to obstruct change.

As the Medicare debate heats up in Congress, the President
is likely to start to weigh into the fray. In his State of the
Union, after all, the President made comprehensive Medicare
reform the second biggest item on his domestic policy agenda
after the tax and economic stimulus package. Now that that bill
has been enacted, the stage is set for round two. If anything is
clear, this is a very disciplined White House, and they can
expect to stay on schedule.

House Developments

Congressman Bill Thomas is also readying language,
rumored to be largely a rehash of the bill enacted by the House
of Representatives last year. That bill would have created a
Medicare prescription drug benefit as a new federal entitlement
at a projected cost of $311 billion over a 10-year period,
enrolling nearly nine out of ten seniors in a new entitlement
program and displacing existing private drug coverage, which now
covers 78% of seniors.

Chairman Thomas has to cope with a challenge from
conservative members of the House Energy and Commerce Committee
led by Representatives Charles Norwood (R-GA) and Joe Barton (R-
TX), known informally as the “Rump Group.” This group has been
skeptical of the Ways and Means efforts, and has started drafting
provisions of its own, including a serious structural change in
Medicare that would create a new system of competing private
plans, and a targeted drug benefit that would look like a medical
savings account with a debit card for drug purchases. The
inspiration for the Rump Group’s drug benefit is the drug
discount card and account proposal developed by former CBO
economist Joseph Antos and Galen Institute President Grace-Marie
Turner. Estimated cost, courtesy of PriceWaterhouseCoopers, of
the AEI-Galen drug proposal: $302 billion over 10 years.

As of this writing, no language in either body has been
presented to the public. Both Senate and House are keeping the
text very close to the vest.

The Potential Pitfalls of the Medicare Legislation

Most members of Congress have routinely talked of
Medicare almost exclusively in terms of prescription drugs, even
though there is no universal prescription drug problem in
Medicare. But the adults on Capitol Hill also know that this
issue is nothing more than a sideshow to the big business of
structural reform: getting the program ready to absorb the shock
of 77 million baby boomers who will start to retire in just eight

While the drafting of legislative language is now underway,
the pressure is building and will explode in the debate. Look for
some contentious fights over certain key issues. Forget the
money: if the structure is wrong, the function will be wrong. If
the function is wrong, then there will be a whole series of
consequences, some of them explosive. For example:

#1. Beware of the importation of Medicare price
controls into private health plans.
In Medicare,
historically, the budget process has driven the policy process.
This is absurd on the face of it, but that is the way it is now,
ever has been, and ever shall be, according to some folks on
Capitol Hill, amen, forever and ever and ever. The rumor on
Capitol Hill is that the CBO will only score the cost performance
of private plans in terms of the cost control performance of the
Medicare program. But Medicare “cost control” is government price
controls, all dressed up with complex and often stupid or
unintelligible fee schedules the RBRVS, the DRG system, etc.
Thus, the private plans are routinely expected to cost more, and
that means that we “can’t afford” Medicare reform. We can only
afford the price-controlled system of the current Medicare
entitlement under which expenditures increased 9% in 2001, with
skilled nursing care increasing by 20% and home health care by
30%, with no end in sight.

Expect the Left to use this argument, which is precisely the
reverse of the argument it has used in the past, and do so with a
perfectly straight face. In the past, Congress could not rightly
reform Medicare because that reform would mean
decreasing Medicare spending, and cutting Medicare
spending is not a good thing for seniors and congressmen who want
to be reelected by seniors. Now, the new argument is that we
can’t reform Medicare because that would mean increasing
Medicare spending. Can’t spend too much on seniors! We’ve
got to be fiscally responsible about these things. Let’s see:
Decreasing spending is bad; increasing spending is bad. Gotcha!

You’ve got to give the Left credit; they understand the
debate. They know it is not about spending; it is not about
money. That’s for green eye-shaded accountants and too many
Republicans and their friends. Those who are clueless about the
debate don’t get the basic issue: government control versus
personal control of the key decisions. The fiscal argument can
work both ways, with the same result: No real Medicare reform.

The CBO process is the way it is; and it coincides neatly
with the recent intellectual offensive of the Left, recently
highlighted by the Urban Institute’s Marilyn Moon in a recent
edition of Health Affairs, in which she stated that
Medicare outperforms the private sector because of its
“aggressive pricing,” among other things. Of course, the
continuance on this path to Socialist Nirvana is increased
rationing of medical services, denials of services, bureaucratic
delays, longer lines for appointments with doctors and medical
specialists, and more doctors refusing to take new Medicare

The problem of access is now starting to show up in
different areas of the country. The data is not scientific, nor
does it yet appear in peer-reviewed journals of economics. But
the evidence is there, and it is growing. For example, 22% of
doctors in San Diego, California, say that they will leave
Medicare within one to three years (AM News 2/3/03). And
Reuters News Service reported on September 5, 2002, that in 2001
more than 40% of Medicare patients had to wait a week or more to
get an doctor’s appointment, up from 34.6% in 1997.

The next rumor is that in order to keep the cost of reform
down, some members of Congress or congressional staffers are
pondering the importation of Medicare’s price controls into a new
system of competing private health plans. They call it “deemed”
pricing. So, for the short term at least (the ten-year budget
cycle?) private plans will have all of the price regulation that
accompanies the traditional Medicare program. To accept that is
to accept the basic policy prescription of the Left (it’s the
structure, stupid!). If that’s “Medicare reform,” the
Congressional conservatives, you can expect, will have none of
it. Keep watch and see whether this piece makes it into the final
language of either the House or Senate bills.

#2. Beware of “competitive bidding” as a means of limiting
plan choice
. The phrase “competitive bidding” means different
things to different people. That’s the problem; it has a nice
“free market” tone to it, something that a fiscal conservative
might like if he doesn’t look at the process too closely.

Competitive bidding can mean bidding by one firm against
another to sell a product and to attract customers’ dollars and a
bigger market share. That’s good competitive bidding, and it is
what we also call free-market competition. But it can also mean
government purchase of services, devices, or insurance products
on the basis of a request for a bid. The government then picks
the two or three most desirable (to the government) products or
services, and disallows the rest of the suppliers in the market
to compete for the dollars of consumers. In other words, the
government picks winners and losers; the customers can have only
what the government picks. This kind of structural change is
incompatible with market-based reform. Yet, it is in the “air” as
they say; you can smell it on Capitol Hill, like you can smell
rain in the wind.

No one has made a more articulate case against the
“competitive bidding” approach than Lois E. Quam, CEO of
Ovations, a United Health Group Company, in testimony before the
Senate Finance Committee on April 3, 2003: “Our experience has
shown that competition that focuses on ‘competitive bidding’
tends to be process oriented, rather than results focused. Often,
it serves to reduce competition and limit consumer choice. It
tends to reflect the preferences of the contracting organization,
which often are not aligned with those of consumers. Competition
that places great emphasis on low cost most likely would result
in a more restrictive health care options, not unlike a staff-
model HMO with limited networks, rigid medical management
practices (denial of care) and fewer beneficiary options. In our
estimation competitive bidding that relies on low bids or a
‘winner take all’ approach provides high risk for both
beneficiaries and the government.” Amen.

This is the month for Medicare reform legislation. Pay
attention to the details.

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

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