Obama’s Health Plan: Path to Government Takeover

1. Federal Health Board

2. National Health Insurance Exchange

3. New Public Program, Based on Medicare

4. Play or Pay

Individually, though deleterious, none of these measures would in themselves have the radical and profound consequences that, when coupled together, are sure to follow. Enacted collectively, this is very likely an irreversible recipe for a full-on government takeover of healthcare, along with lower quality, reduced access, higher costs and the full gamut of problems associated with nationalized health sectors the world over.

1. Federal Health Board

This idea first surfaced from former Senator Tom Daschle in 1993 as part of the failed implementation of Hillary Care Part I. It has since been revived in the former Senator’s new book Critical: What We Can Do About the Health Care Crisis, and the idea has been endorsed by numerous influential characters, including a presidential candidate from Illinois.

I have already written on this issue here, but for the purposes of this article, it may be useful to reiterate some of the highlights of how board advocates envision its implementation.

The health board would be modeled largely upon the Federal Reserve Board, as well as Britain's National Institute for Clinical Excellence and the Federal Joint Committee in Germany. It would be composed of a dozen or so “experts…chosen based on their stature, knowledge, and experience, ensuring that the decisions they make have credibility across the healthcare spectrum.”

Because Congress now has the dubious distinction of running healthcare in this country which, as both Sen. Daschle and I agree, it cannot do, this small group will be insulated from the political pressures that board advocates blame for the failure of many congressional health policies. By “political pressures” of course I mean the harping of constituents and other voters (some still call this the First Amendment). In other words: It isn’t congress’ fault, it’s ours! It will make all manner of decisions regarding the delivery, payment, and consumption of healthcare in this country; and because it is intended to be insulated from we the people, its authority and decisions will be virtually beyond reproach.

Of course, numerous studies have shown that, yes, even the Fed is subject to political pressures.

In Daschle’s words, it would “recommend coverage for those drugs and procedures backed by solid evidence. It would exert influence by ranking services and therapies by their health and cost impacts.”

In reality, this group of “experts” will decide who must have coverage, what that coverage must include, how much it should cost, what drugs and procedures are to be permitted for use and, critically, how much we should pay for all of it. Further, it would regulate the insurance industry to the extent of limiting profits and even marketing expenses, effectively turning them into the equivalent of public utilities. It is also very likely to develop some set of standard practices for physicians and other providers that must be adhered to. These “experts,” not you and your doctor, will decide how best to treat you in your time of need, irrespective of any unique circumstances.

That this entity is to be modeled on the Fed is in itself particularly interesting as well, and demonstrates the lack of economic aptitude of its proponents.

The Fed has a single price to set: the cost of money itself through interest rates. A Federal Health Board would have the responsibility of setting hundreds of thousands of prices for medical equipment, insurance plans, therapies, procedures, etc. What makes anyone think that any group could undertake such a challenge and execute it in an effective manner? In fact, as noted in an earlier post, this is already attempted through the Medicare program and it is remarkably inefficient. If one need confirmation of the fact, simply consider the current political strife over the physician reimbursement cuts, to say nothing of the programs overall long-term solvency (The Medicare Payment Advisory Committee [MedPAC] reports that the money runs out in 2019).

Given the reforms to follow, this board will likely have near absolute control over health care; but luckily, as it will be “insulated” from political pressure, we won’t be able to petition our government for decisions we don’t like, so we won’t ruin their plans. Everything will be fine, as long as we just let them run the show and don’t ask questions.

2. National Health Insurance Exchange

Similar in form to that which is currently being attempted in Massachusetts (with less than stellar results), the exchange would be a “connector” where small business workers and others who don’t get insurance through their job to link up with a company and find coverage.

The state would have extraordinarily broad authority over the exchange and participating insurers, including mandated benefit levels and limits on the range of premiums that can be charged to different enrollees. Low income Americans would receive subsidies to help pay for premiums. Any participating private plan must be “actuarially equivalent” to a generous, government-provided plan (See Section 3), making it very difficult for any to realistically compete on a cost basis or to tailor policies to the needs of various individuals.

One notable aspect of this plan I find interesting is that it will circumvent (for some) the asinine restrictions on purchasing out of state insurance. If it weren’t for the standards imposed on participating insurers, this would be a welcome development. In fact, to be frank, the exchange itself would be completely unnecessary if only Congress eliminated the out of state purchasing restrictions and allowed individuals to buy insurance wherever they could find the best deal, instead of being limited to the oligopoly controlling coverage in their own state.

However, through the Exchange, Obama would allow out of state purchasing, but only for those willing to play by his rules. Quite obviously, the intention here isn’t to create a market for insurance, or anything like that, as some proponents claim, but rather to create a controlled environment where all participating agents must adhere to the dictates of the state.

3. New Public Program, Based on Medicare

This, as you can probably guess, would be a publicly run, Medicare-like option that would be open to everybody. However, instead of the relatively limited Medicare benefit menu, it would be more akin to the Federal Employee Health Benefits Program (FEHBP), although it would still emulate Medicare’s antiquated, and downright perverse, payment mechanism and rules which have put the program into the state that it is in today. It would dictate, not negotiate, prices. The federal government would act as the insurer in this regard, collecting premiums from enrollees to pay for claims on their behalf.

It is this aspect of the plan that, coupled with Section 4, makes a government takeover of healthcare eminently plausible.

The Lewin Group, a research firm that does statistical modeling of health plans, estimates that the public insurance option could charge premiums 30% below what an average employer plan cost in 2007. They further estimated that 66% of those who get their insurance through the exchange would choose the public option, effectively doubling the number of individuals under Medicare payment rules (not to mention another 12 million souls that would stem from other SCHIP and broader Medicaid expansions that are being discussed).

Of course it should be noted that without any expansion, Medicare will be broke in just over 10 years.

The idea of a generous standard benefit package however isn’t only bad because it will cause an explosion of costs but, as alluded to above, it will make it virtually impossible for Americans to buy insurance tailored to their needs, and it will render high deductible, HSA qualified health plans all but extinct. Thus, over time, more and more people will gravitate towards the public option.

4. Play or Pay

All businesses will be required to provide coverage for their employees or pay a tax, equal to 7% of their payroll, to the federal government to offset the costs of enrolling workers in the new government-run insurance system. This would increase the costs of hiring workers overnight, making it less likely for businesses to expand and take on new personnel, but there is more.

Because of the tax treatment of employer-provided health benefits and the virtually unchecked demand for health services, healthcare costs are rising far faster than wages. Therefore, employers will have a very strong incentive to simply drop coverage altogether and pay the tax. The irony here, and I think Obama and his ilk recognize this, is that while they will pass a law requiring businesses to provide insurance coverage, the end result will be to force them to drop it.

In many ways, the tax is far easier for employers to contend with than the rapidly escalating costs of healthcare. Preset at 7%, this can be factored into budgets as a fixed cost, and can be anticipated and planned for year after year.

If nothing is done to curb demand for health services however, I don’t think the tax will long remain at the stated 7%. As costs of the program inevitably begin to outpace revenues, policy makers might find it useful to revert to something a little more complex to fund the public health insurance program rather than a payroll tax that would require an act of congress to increase. This could be done by indexing the tax in such a way as to resemble the physician fee schedule based on Sustainable Growth Rate (SGR) projections. In this way taxes could continue to rise without an official act of congress.

Irrespective of the other detrimental implications of this policy, this is a serious erosion of liberty, and one that can be very costly indeed to businesses and the broader economy. Imagine it: the unchecked power to tax.

As noted, the actuarially equivalency standard will ensure that the government plan is far more generous than any private alternative, and special interest lobbyists will see to it that even more services are mandated for coverage. According to John Sheils of The Lewin Group, Obama’s plan “will enormously increase total healthcare spending, but disguise the extra costs by shifting them to tax payers.”

Conclusion

Obama’s plan would not solve anything, in fact it would merely exacerbate the fundamental problem in American healthcare, which is that no one has any incentive to think about price, and will envelop the already over-burdened sector in more and more red tape. For any health reform package to have a shot at success, instilling cost-consciousness in patients and providers must be an essential element. While not necessarily ideal, John McCain’s vision for the future of American healthcare does take us towards that important end.

Some will castigate the McCain plan by arguing that if one is lying on a hospital gurney it is no time to consider, let alone negotiate prices. Such an opinion however can only be drawn from an ill-informed conception of the implications of Sen. McCain’s proposals.

Shaw Tully of Fortune sums it up nicely: “[The McCain proposals] will create a world where health care is treated as the precious resource that it is, rather than a costless entitlement.”

Check back soon for an analysis of Sen. McCain’s health reform agenda.

Pay 4 Performance or Pay 4 Compliance?

One must ask if we are looking to pay for performance or to pay for compliance, for centralized control, for the erosion of medicine as a science and an art.

There has been a great deal of discussion voiced around the idea of a standard service level established by the government for the "benefit" for the populace. 

The doctor patient relationship, we must remember, is one of the most delicate and trusting of all possible relationships between buyers and sellers than can exist in the marketplace. We must avoid, at all costs, the driving of a bureaucratic wedge between the two. 

Expect more on this tomorrow.

It's Starting...

See this story from World Net Daily about an Oregon woman suffering from lung cancer:

"State Denies Cancer Treatment, Offers Suicide Instead"

This should send a shiver up the spine of anyone interested in health and healthcare, and provide a clear example as to the potential pitfalls of a government run healthcare system. There are some very real realities that must be dealt with. Good intentions are not enough.

Nor are the platitudes of the providers-turned bureaucratic-cogs such as Dr. John Sattenspiel, the senior medical director of the company that runs Oregon's health plan: "We had no intent to upset her, but we do need to point out the options available to her under the Oregon Health Plan."

And he's right, and I'm sure he wishes he could do more, but a lack of options is a ubiquitous element of centralized health systems around the world.

The problem in healthcare is cost. It is no different under a government-run system. If you are trying to control costs there are two (and only two) ways to go about it: demand can be controlled via the price mechanism, or supply can be limited via rationing.

People faced with serious life and death decisions should be free to make those decisions for themselves, not subject to the budgetary priorities of the state. Should individuals value something so greatly, there is generally a way to come up with the money. Another scenario of course would be the assistance of charity, as has happened in this case, only the charity isn't a "charity" per se, but rather a large pharmaceutical manufacturing company.  But I thought they were the bad guys?

The goal of access for everyone through government run healthcare doesn't necessarily mean access for everyone. We are, however, all in it together. So if you are going to die from a denial of care, at least you will die secure in the knowledge that your death was an egalitarian experience.

Swell.

Take these parting words from the patient in the story, Barbara Wagner, to heart: "To say to someone, we'll pay for you to die, but not pay for you to live, it's cruel. I get angry. Who do they think they are?"

They are politicians, Barbara, and they think this is their job.

H.G. Stern of InsureBlog has written a poignant rebuke of the story and its implications.

Oh Yeah, It Can Happen Here.

McCain Health Plan v. Obama Health Plan

Stay tuned...

Does Preventive Medicine Prevent Escalating Costs?

Both of the presumptive candidates for president, Democrat and Republican, have made much ado about the promises of preventive medicine. Indeed, the media has participated in the drumbeat of praise and it is now taken for granted that such practices would yield a broad range of positive results.

The logic of the perception seems to be quite straight forward: early screening for diseases will catch ailments early and thus limit the significantly higher costs of managing a chronic illness later on once it has become more malignant. Even better, this is a bipartisan vote getter.

Perception, as we have seen, is not always reality however. Countless studies have demonstrated that the wide scale use of prescribed preventive medicine will not yield lower costs, nor is it likely to contribute to improved health outcomes or lengthier life spans.

The reason: tests are expensive, while the incidence of the diseases being screened for are (relatively speaking) exceedingly uncommon.

Catching a disease early can indeed save money and render future spending on chronic management unnecessary. However, these savings are far outweighed by the costs of testing large numbers of people.

Why? Preventive medicine and screenings are among the primary drivers of increased costs in our system to begin with. A higher rate of testing for diseases in America is nearly ubiquitous over virtually the entire spectrum of health afflictions than for countries with universal healthcare and global budgets. These services are generally the first to be rationed or cut in such nations, and to boast the longest wait times, with the exception of some surgical procedures. Here in the U.S. though we are sometimes guilty of taking it for granted, to the extent that we would legally demand it of our doctors and patients.

Consider a fairly common example, and an altogether tragic disease: cervical cancer.

According to a Rand Corporation study, we could test every woman in the United States for this diesease and yet, over a lifetime, a woman is more likely to receive a false positive from such a test than she is to get cervical cancer.

In other words, more people will think they have a disease that they don’t than people who actually do. To say nothing of the emotional toll this must take on a woman, the follow up diagnostic tests needed to confirm the results, or even the start of clinical treatment itself, further add to overall system costs.

Similar results can be found for most other dieseases.

This is not to say that preventive care is always a waste of money, not in the slightest. For some it can mean the early detection of a potentially fatal disease, for still more it can relieve the anxiety of not knowing whether or not you may be suffering from some unknown ailment.

In this regard, to paraphrase John Merline, preventive care is not like an investment good that promises a positive rate of economic return, as both candidates for presdient like to assert. It is rather more akin to a consumer good that creates benefits in return for a cost.

Preventive testing can be eminantly valuable, but as a mandated public policy, particularly one touted as an elemental cure for the high costs of healthcare, it should be scratched without delay.

If people value the results such testing might yield then, by all means, they should be permitted to receive such services, assuming they are willing to pay. However, if preventive medicine were authoritatively enforced, we should not be surprised when overall spending refuses to abate, or when we start to see the same kinds of waiting lists that are all-too-common for similar services in other nations.

First, Do No Harm...In a Manner to be Dictated and Determined by Your Friends, the Feds

Nothing in this title shall be construed to authorize any Federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any such institution, agency, or person.
- Social Security Act, Sec. 1801, Title XVIII

During my first year in D.C. I made a magnificent social faux pas. While at a cocktail hour for German corporations investing in America, a woman remarked: "I can't believe what a great turnout there is here." Quite naturally, I responded as such: "Well you know what they say about those Germans: you better join the party or they'll come get 'cha."

I felt like Michael Richards at Laugh Factory.


The woman who made the remark found it hilarious, everyone else chuckled nervously and looked for other circles to join.

Luckily, the consequences of my ill judgement were confined only to those unlucky few who happened to be within ear shot. There is a concerted effort however, in the world of health policy, to do just what I said. The message being sent to doctors, patients and insurers: "play along, or we'll come after you." This plan is being openly advocated by the presumptive Democratic nominee for president, no less.

The concept of a Federal Health Board has been coming up more and more of late, and it is almost certainly going to be a mainstay of any Democratic health reform efforts. It is not a new idea, however. Former Senate majority leader Tom Daschle introduced such a proposal as part of the Democrats' failed 1993 health reform agenda. It has since resurfaced in his new book Critical: What We Can Do About the Health-Care Crisis, and the idea has picked steam. Even Fed Chairman Ben Bernanke paid it lip-service in a recent Washington event.

It boils down to this, to quote Sen. Daschle:

Congress is just not capable of being the manager of a healthcare system and yet it's largely Congress today that has that responsibility. It hasn't worked for the last 50 years. It'll work even less in the next 50.

I couldn't have said it better myself, but there ends our agreement.

Proponents of the board envision an authoritative, decision-making body modeled after the Fed (as well as Britain's National Institute for Clinical Excellence and the Federal Joint Committee in Germany). Why the Fed? Well, because it must be insulated from the political pressures that Congress is subject to. It is the interference of politics (i.e. the need to please constituents and respond to petitions of grievances), Sen. Daschle and his ilk assert, that is responsible for the fact that Congressional action never turns out the way it was intended. It isn't Congress' fault, it's ours! If anyone has forgotten, however, the right to "petition the government for a redress of grievances" falls under that pesky first amendment.

Michael Cannon of the Cato Institute puts it right when he says:

If you can't implement your plans without taking away someone else's first amendment rights, maybe you should rethink your plans.

Further, the health boards of Britain and Germany are themselves becoming increasingly unpopular for the very reason that they have become quite adept at controlling costs, but at the expense of safe-guarding access and patient choice.

The body being discussed will be composed of a panel of "experts...chosen based on their stature, knowledge, and experience, ensuring that the decisions they make have credibility across the healthcare spectrum... It would recommend coverage for those drugs and procedures backed by solid evidence [and] would exert influence by ranking services and therapies by their health and cost impacts."

Phew. For a minute there I thought we might leave medical decisions between doctors and patients.

This board would have the virtually unchecked power to require people to purchase insurance, as well as what that insurance must cover and how much it must cost. This panel of "experts" [whose appointment, I'm sure, will have absolutely nothing to do with politics, as the board's proponents suppose], under the guise of ensuring "quality" care, would dictate which medical goods, services and procedures are permissible and under what circumstances. They will define what treatment options patients will have and mandate how physicians will administer those options, and at what price.

Unfortunately, for requirements such as these to work, there must be a stick to enforce them (this would be the "play ball or pay the price" clause, likely through a fine or some such measure); and for price controls to work, there must be limits placed on supply, which invariably lead to shortages and further difficulties in accessing care.

And then there is there is the personal relationship between the doctor and the patient themselves.

Healthcare is an intensely personal matter, and the doctor-patient relationship has long represented the epitome of trust. It is almost universally recognized as an essential element to the practice of medicine. How is it that a single board in Washington can realistically be expected to dictate the terms of that relationship for millions of individuals in millions of individually unique circumstances? Talk about a "one-size-fits-all" melee.

Far from merely being unable to regulate the relationship, the very nature of this approach undermines the doctor-patient relationship quite severely, as it gives physicians every incentive to game the system. Doctors would order more of the procedures that cost more and less of those that might be more appropriate or cost-effective. We see this phenomenon occurring already in the Medicare program with the use of Magnetic Resonance Imaging (MRI).

On the flip side, they may be prohibited from performing certain procedures they deem medically necessary but Washington has decided wasn't cost-effective enough. Our neighbors to the north are dealing with this same problem, as is most of Europe, as well as our own Medicare system, which boasts a higher denial rate [6.9%] than any private insurer.

In essence, doctors would become a mere middle-man between the patient and the demands of his bosses in Washington. This isn't really an atmosphere conducive to innovation and progress.

A Federal Health Board would be an unprecedented and, very likely, irreversible step towards government run healthcare. In many ways, it would be the symbolic representation of it's implementation.

There will be a great deal of talk about this in the lead up to the November elections. If you take one thing away from this article, let it be this: every time you hear a politician talking about the grandiose possibilities of a Federal Health Board, just remember that you are listening to the same people who can't even administer a school lunch program. Do you want to surrender your healthcare to that?

Bernanke Gives Consideration to Fed-like Health Board

The indispensable journal Modern Healthcare's online version (www.modernhealthcare.com) ran this story.

To be fair, the comments made by Bernanke were in response to a question posed by Sen. Max Baucus, a staunch opponent of consumer-driven healthcare and chairman of the Finance Committee which oversaw last weeks hearing on further HSA regulation. That he entertained the notion however is a touch disturbing. A healthcare Fed is likely to be a mainstay of any Democratic reform initiative, and is, in many ways, antithetical to the idea of freedom and choice in healthcare. I see no way such a proposal can yield positive results.

Check back soon for a more in depth analysis of this. I think we'll be hearing an awful lot about this in the months to come.

Medicare "Reform" Bill Blocked In Senate

The Senate voted 54-39 on Thursday to block consideration of Senate Finance Committee Chairman Max Baucus' Medicare reform bill, which would primarily use cuts to Medicare Advantage plans to fund higher payments to physicians.

Background

Medicare Advantage (MA), or Part C, replaced the Medicare + Choice program with the passage of the Medicare Modernization Act of 2003 (MMA). Medicare + Choice was the first offical public program to make use of HMO's, PPO's and other managed care options in an effort to constrain costs. MA continues in this vein and expands upon it.

In essense, seniors now have the option to join a "private" managed care plan. Different plans compete to offer premiums and benefits that are either above or below a Centers for Medicare and Medicaid Service's (CMS) set benchmark. If the offering is below the benchmark, the plan has to pass 75% of the "savings" on to the beneficiary in either lower premiums or expanded benefits while the remaining 25% must be "returned" to CMS.

The plans typically include extra benefits and lower copays, but services and doctor choice is limited. Further, the Medicare Advantage program has proven far more expensive to administer than anticipated, unlike Part D (the prescription drug benefit), which has come in below expectations.

Sen. Max Baucus (D-MT) - "We all know what this vote was about, and it wasn't about what's best for America's seniors. The White House doesn't want overpaid private plans in Medicare to lose a single dime."

Assessment

In attempting to inject some semblence of market competition into the Medicare program, both MA and Part D should be applauded. Unfortunately, both subprograms are still subject to the same laws of economics that govern every other program, and prone to the unintended consequences which government manipulation of industry typically brings.

Legislation such as this misses the fundamental problem underlying the Medicare program as a whole. To paraphrase Michael Cannon of the Cato Institute, what needs to be fixed is Medicare, not its prices.

Firstly, the money for the doc fix proposed in the legislation would have come from Medicare Advantage's Stabilization Fund, which was a $10 million sum set aside by MMA 2003 to fund regional PPO's and incentivize them to expand into underserved regions where access is deemed limited.

This, in iteslf, is not especially problematic, and many critics claim (dubiously) that there is already sufficient access to care and coverage in these regions. However, the scrambling for funds to postpone the inevitable physician fee cuts is indicative of just how poor shape the Medicare program is in. This legislation does nothing to address that. It is a politically expedient quick fix to a far larger problem.

In my own humble opinion, more often than not, hospital and physician reimbursement rates are in fact below costs, and this legislation would, in part, seek to redress that (In the spirit of full disclosure, I should note that my father is a surgeon and my mother a nurse, so I have long seen this side of the story, but I am also acutely aware of the varying perspectives on the issue.) However, Sen. Baucus is 180* off in his assessment of the motivation for any opposition to the bill, as well as in his hopes for its implications.

Physician reimbursement rates are set to be cut by 5% each year for five years straight. Baucus is quite right, a 25% reduction in rates certainly will not incentivize doctors to treat more seniors. [For a more detailed explanation of how this process works, see "How Do Medicare Reimbursements Work?"] But if he thinks that cutting payments to MA plans to delay this inevitability will do do anything to improve access for seniors, he is mistaken. His is an ironic assessment indeed, as the money he plans on using was itself intended to increase access for underserved regions.

Government payments to Medicare Advantage plans, seeing as they are so highly regulated, will have an impact on seniors' access to care, but it is not the one that Sen. Baucus and his colleagues would like.

As noted above, CMS sets the benchmark for the services that MA plans must offer, and at what price they must offer it. Participating insurerrs are effectively forbidden to offer cheaper coverage options or tailor plans to better suit individual needs. If they were to provide such choices, with plans costing below what CMS deems appropriate, any "savings" would be forfeited to the goernment. Thus, there is little incentive for innoation or flexibility in coverage options.

Further, as prices for medical procedures are effectively fixed across the board [again, see "How Do Medicare Reimbursements Work?"], and minimum benefit levels are set, any payment cuts to plans is effectively ordering insurers to provide the same level service at a lower price, eating the loss themselves. As this scenario is highly unlikely, the cut will likely be passed on to physicians in insurers' networks.

After a certain point, this is almost sure to reduce both insurer and physician participation in Part C, to say nothing of the latters participation in the broader Medicare program as a whole (Parts A and B), further reducing seniors' access to care; a practical certainty when one considers Medicare's broader fiscal outlook.

Again, it seems a robbing Peter to pay Paul scenario.

Politicians need to stop looking for quick fixes and start looking at long-term solutions. The Medicare program does not need a tune up, it needs a systemic overhaul.

You can expect a post on just how some long-term solutions might be structured in the near future.

How Do Medicare Reimbursements Work?

1) Fee Schedules
2) Updates and Controls
3) Balance Billing Restrictions

1) Fee Schedules

Medicare uses a Resource Based Relative Value Scale (RBRVS) to pay for medical services. Actuaries compute the "objective value" of approximately 7000-9000 procedures, across 89 different coverage areas across the country (about 712,000 different prices). Each is assigned a weighted social "value," which is then converted into a dollar amount via a statistical algorithm and used to determine what fees Medicare will pay doctors for their services.

This is coupled with the Statistical Growth Rate (SGR), which is a congressionally mandated formula, indexed to growth in the national economy, and used to determine any updates to reimbursements to keep in line with budgetary projections. This however has been all but useless in fulfilling that purpose, and Medicare's future outlays far exceed any expected revenues to be had. Estimates vary as to the total cost of the program's unfunded liabilities, but a conservative estimate would peg the figure at around $30 trillion (with a "t." Other estimates put it at upwards of $60 trillion.).

This mechanism is mere pseudo-science to offer the impression that the fees are scientifically determined. If we have learned anything from the command-and-control economies of the world, government is least able to make payments either accurately or differentially, to say nothing of the flexibility required to adapt to ever-changing consumer preferences and supplier needs.

In the case of Medicare fee schedules, once variables like cost-of-living, share of labor, cost-of-practice, medical liability costs, etc., every doctor across the country is paid exactly the same, the very best and the very worst. It cannot account for differences in physician skills, quality of service and benefit to patient, completely unlike nearly every other sector of the economy. These prices are set by Congress, and very often subject to political influence. How's that for promoting quality!

As a method of cost control, these prices are generally set at below market rates although, to be fair, some are set above what the market would pay. This merely illustrates the inefficiency that can be expected when a government body is put in charge of managing such a large sector of the economy, or really any other, for that matter. Further, as Medicare prices provide private insurance companies the culpability cover they need to make thrifty reimbursement decisions, they often shadow price what Medicare pays.

Thus, in effect, the government sets the prices for all services within the health care sector. Think about that the next time someone tells you that American health care is an illustration of "market failure." There is virtually no market to fail!

2) Updates and Controls

To limit Medicare costs, volume control is based on an official projection of the "appropriate" growth rate of Medicare physician utilization, and it is tied to the SGR.

As mentioned above, this methodology does a very poor job of actually controlling volume or costs, as collective incentives tend to have practically no impact on individual action. As reimbursements are indexed to the broader economy, no individual doctor is going to drastically alter the way they practice medicine because the Wall Street Journal says a recession or an expansion is on the horizon.

This failure is illustrated by the by the "tweaks" in physician reimbursements expected over the next five years, which is set for a 5% cut each year. This cut does not take into account the costs mentioned in the previous section such as cost-of-living/practice, et al.

This, quite naturally, is a politically sensitive issue, and groups like the American Medical Association are strenuously lobbying against it. Politicians, for their part, are equally hesitant to cut reimbursements, as they know that this will eventually jeopardize access to care for millions of Medicare patients. To that end, the Congress staved off the cut scheduled for last year, and they are doing their best to do the same this year. While their intentions are right, the efforts are futile.

Eventually, this tab must be called in, and we can expect a 25% cut or more in reimbursements at some point in the future. Currently, about 95% of physicians participate in the Medicare program, but even with the mere suggestions of cuts, combined with the enormous regulatory hassle of dealing with government reimbursement, more and more physicians are closing their doors to elderly patients. There is not a mass exodus from the program, to be sure, but if the trend of cuts continues, we can certainly expect to see the number of participating physicians decline dramatically.

3) Balance Billing Restrictions

No way out for patients.

Cuts to Medicare reimbursements themselves would not be so problematic if certain legal aspects of the program were not in place. If payments from the government for a given procedure were unreasonably low, doctors could simply pass the remainder to the patient so as to make service viable, otherwise they would have to eat the loss. If a senior could not afford to make up the difference, many physicians would balance bill in other ways, charging wealthier patients more so as to keep charity care a viable possibility. This practice was widely accepted and utilized prior to the 1960s and the advent of Medicare and Medicaid.

While not explicitly prohibited, the practice is certainly discouraged through the program's regulatory milieu. A doctor and patient can contract for a procedure that is covered under the Medicare program, however should they do so the doctor would be forced to forgo any Medicare reimbursement for the next two years. Thus, doctors do not have the flexibility to adjust prices to attract new business or to react to market challenges and opportunities, having the corollary effect of stymieing innovation. Further, when one considers that the elderly are the primary consumers of medical care, such a forfeiture of revenue would be disastrous for most any practice.

The rationale for such an infringement of liberty, as near as I can gather, is that if beneficiaries and providers were allowed to privately contract out of Medicare on a service-by-service basis, it would effectively create a two-tiered health system where the wealthy would get better health treatment than the non-wealthy.

This falls on it's face however once one considers the numerous studies that have shown that, even in explicitly socialized countries, the wealthy and well-connected typically receive a higher level of care with much shorter wait times; either that or they just come to America. The same can, and does, occur in America, with wealthy seniors typically having their own insurance policies and utilizing Medicare as a mere supplement.

Thus both doctors and patients are stuck between a rock and a hard place. Docs can either provide the service at a loss to themselves, which will eventually force them to cut back on other services, or they can stop accepting new Medicare patients, making it more difficult for the elderly to acquire the care they need. In either case, the outcome is far from ideal.

----------------------------------------------------

Keep this in mind the next time you hear cries for "Medicare for all."

The Opening Salvo

In the halls of Congress, far away from the headlines chronicling the pontifications of presidential aspirants, the first legislative shots have been fired in the bid for the future of American health care.

Of all the days out of the year, the House of Representatives passed the Taxpayer Assistance and Simplification Act of 2008 on April 15, 2008, Tax Day.

Introduced by Rep. Charlie Rangel (D-NY), the legislation would do exactly the opposite from what it's name implies. In essence, it is an assault on the consumer driven health care movement. It is the preverbial shot across the bow, signaling that the competition between the two visions for the future of health care, single-payer v. patient-centered, has begun.

Summary:

Current law requires HSA holders to document their withdrawals in the event of an IRS audit, with rules identical to those long accepted as adequate and appropriate for Individual Retirement Accounts (IRAs). This legislation would require that they document every single withdrawal every time they file their taxes, an unprecedented attrition of a promising program.

This would make paying for health care, not to mention filing taxes, perhaps the two most hideously convoluted procedures Americans can undertake, even more complicated. This is an ironic detail given the title of the legislation and it’s date of passage in the House (April 15th). It would also increase the costs for policy holders, as administrators would be forced to verify every single withdrawal. This erodes the essential flexibility that is the very intention of the accounts and so critical to the future of the health care market.

Rationale:

Health Subcommittee Chairman Pete Stark (D-13th CA) and Charlie Rangel (D - 15th NY), both staunch opponents of HSAs since their inception, cite two main reasons for the legislation –

1. It is necessary to prevent people from claiming a tax break for nonqualified expenses.

Fact: The GAO found that more than 90% of HSA withdrawals are for qualified medical expenses. Even if the remaining 10% were spent on hot tubs, it isn’t against the law. HSA account holders are subject to the same financial penalties required for early IRA withdrawals.

Further, proponents can cite no evidence of actual malfeasance. In fact, Section 20 of the bill “directs the Comptroller General to study and report to Congress on the use of distributions from HSAs.” In other words, the law would require an investigation into whether or not the law is actually necessary. No matter what one thinks of HSAs, that is just bad public policy.

2. It is necessary to forbid them from being misused as mere tax shelters. To substantiate this claim, Rep. Stark complains that “the total value of all HSA contributions to the IRS [were] about twice that of withdrawals.”

Fact: This is precisely the wrong conclusion. What this demonstrates instead is that most people don’t need the amount of health care that is thrown away on premiums for more traditional insurance every year, and thus they can practice the raison d’etra of Health Savings Accounts and save for a time when they will really need that money, that ominous “rainy day.”

More to the point, Reason 1 is in fundamental conflict with Reason 2. Opponents of HSAs are suspicious when people take money out of their accounts, and thus demand substantiation; however they are equally suspicious when they leave the money in, equating it to tax evasion.

Conclusion:

It seems clear that this is simply an attempt to throw a wrench into the gears of progress in the consumer driven health care movement. This is an attempt to discredit the philosophical alternative to the single-payer vision, and the only viable method to reduce costs, expand choice and improve quality.

Again, we are well aware that the fight for the future of health care is coming, and this legislation is the opening shot. If we are to have any chance of prevailing, this must be defeated now. It is not enough to relinquish the fight and hope for a presidential veto (which Mr. Bush has threatened). Defenders of choice, liberty and the rights of patients must make it clear, now, that there is to be no leeway granted in the erosion of our health care freedoms.

The opposition has fired first. How will we respond?

Healthcare and the Cigarette Tax: A Useless Endeavor

Watching the Democratic debate over health care, I am compelled to ask myself a very poignant question: Am I stupid? What am I missing?

Hillary Clinton is finally out of the race for the presidency, leaving Barack Obama to carry the hopes of woeful Democrats everywhere. Near the top of his agenda is a massive expansion of the government's role in healthcare. To finance this growth, there seems to be a a consensus at both the state and federal levels that the Bush tax cuts bust be allowed to expire and a higher tax on cigarettes levied.

Let's forget for a moment that to think such measures would adequately fund the promises being made requires one to hold a passport to budgetary fairyland, and instead examine this proposal on a far more superficial level. Others have already addressed the derogatory effects that tax increases would have on the overall economy, in far more eloquent prose than I here can offer, so let us stick to the cigarette tax.

At first glance, this would seem to be a no brainer. Higher prices for cigarettes will disincentivize people from a health-deteriorating habit while producing revenues to pay for an expansion of health benefits. Who could argue with that logic? It might not work for everybody, but I'll take a shot.

Consider first and foremost that any tax on cigarettes is likely to be highly regressive, as it is primarily individuals of lower incomes that tend to smoke. Taxes on the poor to pay for health care for the poor? The phrase "robbing Peter to pay Paul" comes to mind.

More to the point, the funding for the expansion of the government's role in health care is premised upon the anticipated revenues to be had from a higher tax on cigarettes. However, if the tax has the consequence that its advocates presuppose, that less people will buy cigarettes, it seems to me that the anticipated revenues will not be there. In other words, in order for this policy to work, it has to fail. Couple this with the massive shortfalls already anticipated in the funding of government health programs and it hardly seems an adequate remedy for any of our health care problems, even if it worked.

I am all in favor of expanding access to care and encouraging healthy behavior, but this is far from the way to do it. There is a far more cost-effective method that is likely to work better and, get this, not infringe on individual liberty. It may sting a bit, but here it is: the market.

Health Savings Accounts (HSAs) to be specific, and the movement away from employer-provided health insurance to be still more precise.

As it stands, close to 70% of Americans receive their health insurance through their place of business. Because of this anomaly (the product of a fluke 1943 IRS ruling [we don't get home or car insurance through work]), and various federal laws, we are all lumped together in one big malfunctioning pot, where incentives are absent to down-right perverse.

Thanks to many state laws like community rating (everyone pays the same price regardless of age or health status) and guaranteed issue (insurance companies must insure all who apply) , we know that we can wait until we actually get sick to purchase health insurance. This is hardly an incentive to keep oneself in shape. In no other field of insurance do things work this way.

Take life insurance. If you are a middle-management paper-pusher with a pension for diet and exercise, it is likely that you will get a pretty good deal. If, on the other hand, you are a racecar driver who likes to spend his free time sky diving and jumping motorcycles through walls of fire, your premium might be a bit higher. Can you tell why? The odds of you kicking the bucket in some sort of fiery free fall accident are a little greater. If you've ever seen the Ben Stiller movie Along Came Polly, these vagaries of risk underwriting should be familiar to you.

Apply this logic to health insurance, assuming an individual market funded largely by Health Savings Accounts.

A young librarian who likes jogging will find it easy to become insured (even on the individual market). A three hundred pound fast food addict that smokes three packs of menthol's a day will find it slightly harder. He'll find insurance, but it will break his bank to afford it.

If premiums were based on life-style choices (like, say, smoking) people might think a bit more about how they treat their bodies. They don't need anyone to put a tax on their Newport's for them to make the right decision. When it hits you in the pocket book, that is all the motivation you need.

Alas, health insurance doesn't work this way. Laws like those alluded to above ensure that the young, the unhealthy, and indeed anyone can wait until they get sick before attempting to buy insurance, driving up the cost for everyone and pricing many people out of the market altogether.

Do people wait until they wrap their car around a tree before they purchase car insurance? No. They pay reasonable premiums to insulate themselves from the immense expenses that can be incurred should the unfortunate occur. Many, like myself, even take defensive driving courses to further reduce the rates they have to pay.

Does this remind anyone of the diet and exercise classes that many businesses across the country are beginning to "encourage" (read: force) their employees to enroll in? I think most people would agree: If it means I save money, I don't need my boss to be my aerobics instructor, I'll sign up for Jenny Craig all by myself.

So here we are. We have a fragmented health care system that insulates poor decisions and passes the cost on to others. Somehow, I don't think a cigarette tax will solve that.