THE TRUTH ABOUT MEDICARE

Not Good For You?

Not Good For Your Doctor.

• Our Dysfunctional Medical Marketplace
• History of Medicare
• Medicare as Health “Insurance”
• Why Our Hospitals Are In Trouble (And Why Your Hospital Bill is so Outrageously High)
• Why Doctors Want Out

Richard L. Taw, M.D., President

American Private Physicians Association

The following is a transcript adapted from the presentation made by Dr. Taw on February 17, 2004 at the quarterly meeting of the St. John's Community Health Education Program in Santa Monica, California.

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This is a remarkably rare event and opportunity. Rarely do the two primary stake holders in our healthcare system ever have the opportunity to talk to one another about how our system works and the problems it faces. When Medicare was first debated in the 1960's, there were no public hearings. The discussion regarding all the healthcare legislation that has been passed since then is almost entirely a conversation among special interest groups, their lobbyists and our senators and congressmen. This 500 person secret commission that was established in the early 1990's to remake the US healthcare system consisted of pundits, academics, and lobbyists. There was no practicing physician representation or any direct healthcare consumer representation. So this is an unusual opportunity, and I will be very interested in your response to the information which I will discuss.

This information is, unfortunately, very complex because of decades of healthcare legislation which has made healthcare the most regulated industry in our country. Over 130,000 pages of federal regulation govern everything hospitals and doctors do. In addition to this, there are over 1500 state mandates regulating the health benefits products (aka health insurance) that we have available to us. The consequences, both intended and unintended, of all of this are very difficult to explain. It is not easily distilled into a catchy political slogan, summarized in a 20 second sound bite or presented in a three part expose in the newspaper.

Nonetheless, I will do my best to present to you the salient points which most affect you and your doctors. There are a number of things I am not going to talk about this evening. There are handout materials which you have received which include a presentation about private healthcare. For more of that information, I would simply suggest that you visit our website or call APPA. I am not going to discuss many of the specific bills that have been passed in the last 40 years. If you are interested in these details, we have provided in your handout a copy of an article from our website entitled: “GovernmentCare: A Chronology of Federal Regulation and Government Control of American Healthcare”. In addition, I am not going to talk specifically about Medicare part D which has been ably discussed by our first speaker. I have my own view of this new law which is contained in four additional pages we have provided for you from our most recent APPA newsletter.

Slide #2

Physicians at medical meetings are now required to show financial disclosure slides as they begin their talks. This is because physicians are usually talking about drugs and devices, and they are required to reveal any financial connection they have to the manufacturers of those drugs and devices. I have always felt that those who speak about healthcare and express an opinion should likewise disclose anything that may indicate their bias.

So, for what it's worth, I will state that I am a volunteer as are all members of the APPA Board. We have devoted several thousand hours of our time to promoting private healthcare, and we have no profit-making financial entity that benefits from such promotion other than our own medical practices.

Politically, I long ago registered in the State of California as “None of the Above” because Independent is a political party in this state. If you review the Government Chronology document, you will see that administrations of both political parties and congress of both political parties share equal guilt in advancing the interference of government in healthcare.

By occupation, I am a cardiologist and have been in practice for almost 30 years. For 17 years I helped build a large cardiology group practice and seven of those years I was its managing partner. Therefore, I am very familiar with the business of medical practice and the affect of government regulation. I left that practice because it wanted to do HMO/Managed Care, and I did not. For ten years I have been the owner/entrepreneur of a unique private healthcare cardiology practice. And for ten years I have been an advocate for private healthcare through APPA.

I have three motivations for volunteering my time in this manner. First is the welfare of my patients which I have seen to be adversely impacted by government regulation. Second is the future of my children. As I will show you, Medicare is going to change dramatically over the next few decades, and it will not change for the better. I sincerely hope that there will be a better system available as an alternative for my children when they reach age 65 in another 30 years. And finally, I am motivated because I am 60 years old this year, and in another five years I will, myself, have no choice but to give up my Blue Cross PPO plan and join Medicare. I know nothing that will change in Medicare over the next five years that will improve it. Like all of you on Medicare in the audience, I know I will face difficult choices, rationing and a deteriorating healthcare system at a time when I will need it most.

Slide #3

The topics I will discuss this evening include a view of the medical marketplace which is very dysfunctional when compared to the usual marketplace exchange of goods and services between customers and businesses in this country. I will give a brief history of Medicare which is relevant to understanding our current dilemma. I will discuss Medicare as a health insurance product from the point of view of someone such as myself who must give up the best PPO plan he could obtain in California for Medicare coverage. I will also discuss a very important topic to all of us which is why our hospitals are in such trouble here in California today. And finally, I will discuss why doctors want out.

Slide #4

Our Dysfunctional Medical Marketplace

The medical marketplace from the consumer's point of view is very odd. Consumers do not see it as a service for which they should pay a fee. Most consumers consider healthcare a “right”. Somehow, Americans should have a right to excellence in health or better healthcare or easy access. But what most consumers really mean by a “right” is that healthcare should be “free”. That means someone else should pay for it. But of course, it is not really free.

It is entirely an accident of 1943 IRS Regulation that employers pay for healthcare benefits for working Americans. The employer “taxes” the employee by transferring money that could go to that employee's paycheck to a health benefits management firm which provides for needed healthcare.

And certainly Medicare is not “free” because it is paid for out of general tax revenues and taxes on working Americans in addition to the premiums that all of you pay. Some seniors feel that their Medicare payroll tax has already somehow invested in a “trust fund” and therefore their care should be free. Of course, the trust fund is a fiction, and the monies that working Americans pay into Medicare go to pay the expenses of current beneficiaries.

Slide #5

In addition to the distorted view of how healthcare services should be reimbursed, the manner in which those services is reimbursed does not in any way resemble a normal marketplace. I pay for a healthcare attorney's services in a normal marketplace relationship. I happen to employ a more expensive attorney because I think he has more wisdom, uses his time efficiently on my behalf, and accomplishes what I ask him to do in an effective manner. He charges me $395 an hour. The paralegal who works for him charges $105 an hour. This is a standard means of providing a service common to lawyers, accountants and consultants.

Physicians provide services of a similar if not more important kind. However, they are not reimbursed for the time they spend. They are not reimbursed for being more skilled or more efficient or more effective. They are reimbursed by the type of procedure they perform. If a doctor is deemed by his customers to be better than another doctor, reimbursement is still the same.

That doctors are reimbursed by the procedures they perform is an artifact of physician reimbursement concepts in the 1800's. At that time doctors were treating obvious disease and performing procedures such as lancing a boil or operating on a ruptured appendix. The cognitive services which are so important today were not as obviously necessary. We treated disease late in its development.

This method of reimbursing doctors has continued so that all procedures including tests and visits in a doctor's office are regarded as single events and paid at a standard fee rate. Since 1983 and the Resource Based Relative Value Scale from Medicare, these reimbursement rates are no longer “fee for service”. They are a fixed fee in a price control scheme. Thus a doctor who may be more expert or expeditious is no more valued in terms of reimbursement than an incompetent physician.

In addition, doctors cannot be paid unless there is a disease linked to that procedure. A CPT code is submitted to identify the procedure, and there are thousands of these. An ICD-9 code must be entered which represents a classification of the disease treated. A disease must develop before a procedure is performed for Medicare reimbursement. This is why preventive services are so difficult under such a system. They do not represent a disease and are included in Medicare only after political action. This was true for the inclusion of screening mammograms and PSAs for prostate cancer.

On the hospital side, there is a fixed price control scheme as well. Hospitals are reimbursed by diagnosis since 1983, not by services rendered. Both at good hospitals and bad hospitals, a fixed fee is paid for every admitting diagnosis. The most easily understood example is DRG #80 which is simple pneumonia. A hospital gets on average $4300 for this DRG. If you come through the emergency room and are identified as having pneumonia and are admitted to an ICU only to die 6 hours later, the hospital gets $4300. If you are more fortunate and survive in the hospital to be released 16 days later, the hospital gets $4300. It is, therefore, easy to understand why hospitals have no hope of reaping any profit from sick patients under this Medicare system. That $4300 dollars would easily be used up in the first 36 to 48 hours.

On the outpatient side, there is a similar system since the year 2000. It is being phased in over 5 years. These are called APC or Ambulatory Payment Classifications. Hospitals performing procedures get a fixed fee based on that procedure and cannot charge any portion of the retail rate which they formerly used to do and which I will discuss in a short time. It is thus apparent that reimbursement for medical services by doctors and hospitals is nothing like the rest of the enormously successful marketplace of American business.

Slide #6

From the physician's point of view there are rapidly escalating uncompensated customer services. Physicians are paid only for the face to face time they spend with you. They are not paid for any preparation for that visit or any services that may come after you leave the office. With the endless forms required for documentation of your visit by Medicare, physicians spend a considerable amount of the visit time either typing into a computer or filling out a form regarding the visit. If they do not, and cannot document the level of service they provide, Medicare can audit them and accuse them of committing fraud. Each allegation of fraud is subject to a $10,000 fine and five years in prison. Therefore, it is very important to physicians who take care of Medicare patients that they and their staff expend considerable resources and time completing forms and paperwork.

The endless changes in prescriptions by pharmacy benefit management companies result in faxed and mailed forms that must be filled out on your behalf as well, all without charge. The regulatory compliance under HIPAA and the new privacy guidelines create enormous additional paperwork burdens which represents an unfunded mandate.

In addition, many physicians such as myself employ nurse practitioners or physician assistants to help them better manage a larger volume of very ill patients. I employ two wonderful nurse practitioners who help me manage my patients and provide services for them in a manner much better than I could ever hope to accomplish myself. However, unlike the paralegal in my attorney's office, these nurses cannot submit independent fees to Medicare. Just like the situation with a home office and the IRS, this is a tremendous red flag to Medicare and results in audits and potential fines and prosecution. So physicians have to support these services without charging patients more.

There are ever increasing demands for telephone access to doctors and on-call access after hours and on weekends. This uncompensated service is increasingly onerous and has changed the way physicians have organized their practices.

Slide #7

In addition it is increasingly clear to doctors that patients are not our customers. A customer pays the bill. When government pays, massive strings are attached. In addition, when employer-managed care pays, the contract that the doctor signs has restrictions as well.

Slide #8

From the payer's point of view, the medical marketplace is simply a cost item. They may talk about quality and access, or the uninsured, but to them healthcare costs too much, and their actions are all about strategy to minimize that cost.

Slide #9

Brief History of Medicare

The biggest single myth about Medicare is that seniors did not have any sort of healthcare coverage before Medicare was enacted. The 1960s were a different time in medicine. We did not have any expensive imaging studies such as CT scans, MRIs or PET scans. We did not have fancy new surgical procedures like laparoscopic surgery. We did not have any of the modern drugs or biologicals which we enjoy the benefit of today. The primary source of catastrophic medical expense was being hospitalized. And in the 1960's seniors had hospital insurance. In 1962 sixty percent of seniors had their own hospital insurance of various types.

Because of rising hospital expenses, the Kerr-Mills law was passed in 1960 and was signed by Dwight Eisenhower. This was unfortunately titled the “Medical Assistance for the Aged Program”. It was a voluntary program and 77% of seniors qualified. However, it was not very successful with voluntary enrollment. After all, who would want to sign up for a program with that title? In addition, the majority of seniors had some sort of coverage.

Slide #10

Few people realize that Medicare is the legacy of John Fitzgerald Kennedy. In his 1961 State of the Union address he proposed a mandatory hospital insurance plan for the elderly. When this issue got political legs, the Republicans countered in 1963 with a “Better Care” program. Arguing that seniors already had access to hospital coverage, “Better Care” would have covered outpatient and physician's services. The AMA also countered with “Eldercare” which was a program for the poor elderly. Both of these programs were voluntary.

Slide #11

The single individual who put all of this together was Representative Wilbur Mills. Medicare is called his “3 Layered Cake”. Mandatory hospital coverage became Medicare Part A. A voluntary outpatient coverage program became Medicare Part B. A voluntary healthcare program for the poor of all ages became Medicaid. The frosting on the cake and the brilliant political strategy was linking this to Social Security. Signing up for Social Security benefits automatically enrolled someone in Medicare Part A and immediately terminated private health insurance. And seniors had not had an increase in Social Security since 1959. This bill came with a 7% Social Security increase. Therefore, it was extremely popular with seniors and all the stakeholders got something out of it.

Slide #12

In the week before it was signed there was great consternation among hospitals and physicians. President Johnson met with their representatives and made several promises regarding implementation of the bill and its administration. He said it would not be like Britain and a socialized system in that patients would not be assigned to doctors. In addition, the government would not pay directly for services as in a socialized system. The program would be administered by familiar private insurance companies, Blue Cross and Blue Shield. In addition, doctors could charge “fee for service” at “reasonable rates”. Thus, it resembled a “private” plan. He signed it into law on July 30, 1965 at the Truman Library in Independence , Missouri . The first Medicare card was issued to former President Truman.

Thus Medicare, from its outset, was intended to be a system for financing healthcare as it was in the 1960's. That meant covering catastrophic hospital expenses and what were relatively minor outpatient services. Medicaid was a part of it and extended a very basic package of healthcare benefits to the poor. It was never intended to increase the profits of hospitals or the wealth of physicians. It was never intended to rapidly increase the cost of providing healthcare services.

Slide #13

It is useful to review Medicare's finances. As Medicare recipients, you should understand who pays for your care. The mandatory hospital coverage in Medicare Part A is paid entirely by the 2.9% payroll tax which working Americans pay. Half of that comes from the employee's paycheck and half from the employer. Medicare Part B for outpatient services is paid by beneficiary premiums, but only up to a level of 25%. The other 75% comes out of the general tax revenues that all working Americans pay. Thus the overwhelming majority of seniors' healthcare expenses are paid by someone else other than the beneficiary.

As I have alluded to earlier, Medicare no longer pays real “fee for service” payments to doctors and hospitals. It pays on the basis of a price-controlled fee schedule and pays only 80% of that fee. Medicare sets the fees and the rules.

Slide #14

Medicare as Health “Insurance”

As I stated earlier, I will be on Medicare in five years. Therefore, I am interested in Medicare as a health “insurance” product. In actuality, of course, it is a defined benefit plan and has nothing to do with the philosophy of insurance against healthcare risk. However, I am trading in the best Blue Cross PPO 1000 policy which I have now, and the comparison is useful, particularly to someone like myself who is anticipating the transition.

The biggest problem with Medicare is that there is no catastrophic coverage provision. My current Blue Cross plan has a $5,000 cap or stop loss. It also has a $1000 deductible. However, under Medicare there is no hospital coverage for over 150 hospital days. Thankfully, this should affect very few beneficiaries. However, after 60 days there is an increasing daily rate charge from $219 per day to $438 per day after three months. After 150 days, you pay everything.

Perhaps more importantly, there is inadequate nursing home coverage. Medicare pays for the first three weeks, but after that the beneficiary pays a portion, and after 100 days there is no coverage.

Slide #15

In addition to the absence of the catastrophic coverage cap, Medicare also is an incomplete insurance product. On average seniors pay out of pocket for 18% of their yearly expenditures even after their Medigap policy pays. This averages out to $2510 per year per Medicare beneficiary. However, there are hundreds of thousands of seniors who pay even more. A quarter of a million seniors pay over $10,000 a year in out of pocket expenses in addition to what their various Medicare policies pay.

Slide #16

Also, there are many uncovered services, some of which are part of normal health insurance policies and managed care plans. The most important of these are preventative services. As I explained earlier, you have to have a disease in order to have a procedure paid for at your doctor's office. The inclusion of preventative services is entirely political and the result of intense special interest lobbying. This was true for the inclusion of mammograms and PSA prostate screening for example.

Medicare does not pay for medications. This is left to the Medigap policy or the new Medicare Part D coverage. You can expect that politics will become even more intense regarding what medications are or are not covered.

Perhaps the biggest uncovered service and the greatest worry for seniors is long term custodial and home care. This is not addressed in any way by any part of Medicare or Medigap policies. In fact, the insurance for long term care which is available in this country is woefully inadequate. Anyone who calculates the actual cost of custodial and home care will soon realize that the amounts that are paid with these policies are far below the cost of such care.

In addition, dental procedures, alternative medicine, most chiropractic care and services outside the United States are not covered by Medicare. Some Medigap policies address some of these benefits.

Slide #18

When comparing my present Blue Cross 1000 policy to Medicare, I must conclude that Medicare is an extremely expensive product. At the very least one must conclude it is not in any way a “free” entitlement from government.

Currently the Medicare Part B monthly premium is $67. One of the best Blue Cross Medigap policies in California costs $299 per month. Because that policy has a $3,000 limit on drug expenses, I would have to enroll in Medicare Part D to obtain catastrophic coverage for pharmaceutical expenses. That is another $35.

However, one has to look at the investment already made in Medicare. The largest part of Medicare expenses are paid from general tax revenues. Any of us who are more successful and have higher yearly incomes have already paid a significant amount in our income taxes used to fund over 80% of Medicare expenses. None of this is saved for us in a “trust fund” that helps to pay for our own health benefit coverage after age 65.

More directly, we have invested a 2.9% employment tax for Medicare Part A over our working careers. Again, those of us who are more successful have contributed much more since there is no cap on the amount taxed at 2.9%. If you do the simple math of an average American earning $40,000 a year over a 45 year working career, you can conclude that 2.9% of that dollar amount amortized over this 18 year life expectancy at age 65 would mean a $241 dollar per month investment from the “trust fund”. This, of course, assumes that the “investment” was never really invested, and there was no interest accrued.

From all of the above, it is obvious that we can conclude that Medicare is very expensive as an “insurance” product. It not “free” to us from our government. Even worse, it is not as good at the best PPO managed care or indemnity health insurance plans that we could acquire up to age 65.

Slide #19

Why Our Hospitals Are In Trouble (And Why Your Hospital Bill is so Outrageously High)

Between 1965 and 1980 Medicare was “the goose that laid the golden egg”. This was not only due to Medicare reimbursements, but also the federal government invested in hospital building programs by providing tax advantages and loan programs. Hospitals expanded and were profitable. There were able to “cost shift” which meant they could offset money losing activities by increasing charges to private insurers and Medicare. Thus the community outreach programs and charity work were easily accomplished.

In the late 1980s HMO/PPO managed care contracting achieved enough penetration that the regular under 65 insurance income was diminished somewhat. More cost shifting ensued.

Slide #20

In 1983 Medicare became “the wolf in sheep's clothing”. Medicare introduced the hospital prospective payment system and the DRGs which I previously discussed. Rather than reimbursing a hospital for the cost of services and materials provided to patients, government now chose to pay on the basis of the admitting diagnosis. There was a fixed payment for some 500 disease states in the DRG system. As I mentioned earlier, receiving only $4300 for a diagnosis of pneumonia guaranteed that hospitals would lose money on almost all patients admitted with that diagnosis. Suddenly the profitability of Medicare inpatient services disappeared. Hospitals began losing money.

At the same time HMO and PPO managed care was growing, and they took advantage of the Medicare situation. They began pegging their hospital contract reimbursement rates to a discount from the now much lower Medicare rates. Hospitals began signing managed care contracts just to keep market share. They lost even more money.

Slide #21

Hospitals fought back, and as a result, hospital bills today are extraordinary and have no relationship in reality to what hospitals are paid by Medicare and managed care companies. Their lobbyists fought for an outpatient exemption which was enacted as part of the 1986 Balanced Budget Act. They argued that their outpatient services were a very small proportion of their income at the time, and they could offset their inpatient losses by collecting more for outpatient services. They proposed collecting 20% of their retail charge rather than just 80% of the Medicare fixed fee for outpatient services. With this exemption passed, they then inflated their retail charges generally to five times Medicare rates.

As a result, in my office an EKG may be reimbursed by Medicare at 80% of $29.04. The cost at our local hospitals is $175.00, of which a hospital can collect 20%. Thus hospitals collect 80% of the $29.04 plus 20% of $175.00. In general, hospitals collects twice as much or more than a physician would collect for the same service.

Hospitals must maintain a “chargemaster” of all of their services and cannot knowingly charge less or try to collect less than that under federal law. Thus the uninsured receive extraordinarily high hospital bills because of these inflated retail charges.

As of 1986, hospitals went into the doctor business. They built huge outpatient departments which became profit centers. They survived by offsetting their inpatient losses.

In addition, in 1988 they were able to obtain more reimbursement for inpatients who remained in the hospital longer and used up enormous resources. The outlier formula was introduced. This is a very complex formula which allows additional reimbursement based on a number of factors. The most important is a cost to charge ratio versus a threshold. Hospitals then increased more of their inpatient charges to receive more outlier reimbursement. For some California hospitals, as much as 50% of their meager profit came from outlier reimbursement. Thus they compensated for other inpatient losses.

Slide #22

However, what the government gave, it soon took back. In the year 2000 the government ended the outpatient department profitability. It introduced a prospective payment system for outpatient services called Ambulatory Payment Classification. This was gradually introduced over the next several years and has dramatically reduced outpatient revenues for hospitals.

They have had no choice but to cancel outpatient services which are not profitable. Local hospitals have canceled cardiac rehabilitation, outpatient physical therapy, outpatient occupational therapy, speech therapy, etc.

In addition, in 2003 the Office of Inspector General and HHS began an outlier fraud and abuse effort. Some hospitals had egregiously increased their inpatient charges to profit from outlier reimbursement. This was one of the many problems which now beset the Tenet Hospital System and was widely reported in the media in California .

Slide #23

California hospitals are now in fiscal crisis for three important reasons. First and foremost is the inadequate Medicare inpatient and outpatient reimbursement which they now face. Because California is such a heavy managed care state, the discounted contract rates for hospital services of these organizations have followed the downward reimbursement of Medicare. Hospitals have nowhere left to adapt financially. They operate on a 1-3% profit margin, and any change such as those I have described can put them in the red with nowhere to turn but to slash programs or go out of business.

Secondly, the recent nursing ratio legislation has greatly increased their personnel costs. It sounded great to have a limited number of patients per nurse, but there have been a number of unintended consequences.

One of these is the fact that our emergency rooms have become even worse choking points in the care of sick patients. Every hour in Los Angeles County someone in every emergency room goes to a computer system and designates whether the emergency room is “open” or “closed”. An emergency room is closed to ambulance runs and patients waiting in the waiting room if the patient to nurse ratio in the emergency room is exceeded.

This never used to be the case. Emergency rooms were run like MASH units where patients could be quickly entered and assessed in a hallway or on a gurney as to whether or not they had to be seen at length or could go home. Blood work and EKGs could be done quickly and patient disposition was expeditious. Now, none of that is possible. If all the beds are full in an emergency room in relation to the staff available, that emergency room is closed, the paramedic ambulances have to drive by, and patients have to wait in the waiting area. Only when a bed is available can another patient enter.

Hospitals have absolutely no incentive to enlarge their emergency departments or staff them with more nurses. The overwhelming majority of patients admitted from these emergency departments lose money for the hospital. Taking care of sick patients through the emergency room is a financial liability. What a perverse and tragic consequence of this state mandate and the federal price control Medicare reimbursement scheme.

The third factor is the unfunded California state mandate regarding seismic retrofit. After the earthquake 10 years ago, California passed an unfunded mandate that each hospital had to meet certain earthquake standards by 2007. This has now been extended for most facilities to 2013. Some hospitals have to be rebuilt entirely, others have to be reinforced at great expense.

The tech bubble of the last decade burst, and philanthropy has greatly diminished. Where is a hospital going to get $10 million, $20 million or $50 million to do a seismic retrofit when they can make no profit? This is the main reason that the Tenet Hospital System wishes to sell Daniel Freeman, Centinela, the Marina Hospital , Brotman Hospital , Midway Hospital and Century City Hospital . There is no way they can find the tens or hundreds of millions of dollars that will be required for this California State mandate.

California hospitals have no where to go financially and are encumbered by the intended and unintended consequences of federal reimbursement schemes and state mandates. Their services to patients and physicians will only worsen over the next decade. More regulation and government intervention will continue to make things worse.

Slide #24

Why Doctors Want Out

My son has an independent ad agency, and one of his biggest clients is INC. Magazine. He called me up excitedly in November and told me, “Dad, Dad, you have to look at the December issue of INC. It has a feature article on all that stuff you have been talking about”. So, here it is, the two page opening spread of INC Magazine, December issue. The article is entitled “The Worst Business in America ”. One of the six OB/GYN physicians whose practice is discussed is pictured with a stethoscope listening to his own heart, presumably trying to find out whether he is still fiscally alive.

The story is of a six person OB/GYN group trying to survive in New Jersey in the face of rapidly diminishing reimbursement for OB care and a malpractice crisis in which most of the companies left the state. In the end, the group made the decision to stay together, come up with $500,000 over two years to fund a mutual start-up malpractice carrier and spend $160,000 for malpractice coverage. I did the math, and this came out to $1,250 of malpractice costs for each baby delivered. Their reimbursement rate is $2,100 per baby and falling.

The subtitle on the first page says it all: “Suppose you couldn't raise prices, you couldn't control expenses, and you were morally obligated to meet the needs of customers who were eager to sue if anything goes wrong. An inside look at the forbidding economics of a doctor's office”. This aptly describes the economics of a doctor's practice today.

However, it does not describe the number one problem on the minds of physicians. I wrote back to INC Magazine, and suggested that their subtitle should continue as follows: “And suppose your every business decision was subject to 130,000 pages of government regulation, and government agencies encouraged your customers and employees to become whistleblowers of regulatory violations by giving them one-third of all fines and settlements, and government agencies constantly audited your billing practices with the possibility of prosecution, fines and imprisonment over a billing disagreement. An inside look at the forbidding criminalization of medical practice.”

Slide #25

Listening to the media and our politicians one would think that the concerns of physicians have to do with the cost of care such as medications, access to care in HMO plans, quality of care issues or the uninsured. In fact, however, the major issue facing physicians today who participate in Medicare is the criminalization of practice, the possibility of being called a “white coat criminal”.

Here is how this works. In the real world a billing disagreement with Blue Cross simply results in rejection of payment. If I bill for a coronary angiogram and several of its components at the same time, Blue Cross will reject some of those components and pay only a global amount. Sometimes Blue Cross will not pay for an office ultrasound procedure on the same day another ultrasound procedure is performed, and so forth. However in the Medicare world submitting such bills is considered a crime, an attempt to defraud the government and the American taxpayer. Such “over billing” is not simply rejected unpaid, doctors are audited, fines assessed and some are prosecuted and imprisoned.

In the late 1990's Medicare initiated a lot of auditing using the evaluation and management (E&M) guidelines. These were very detailed descriptions how physicians had to document every single service they provided. If adequate documentation was not made, and a chart was audited, the service was deemed not provided and fraud committed by submitting the bill.

The hardest hit group in Los Angeles were the pulmonary physicians. They were audited for their supervision of nursing home and home oxygen delivery. Typically thirty charts were audited, billing disagreements were identified, an over billing percentage was calculated and projected over the entire doctor's practice. This resulted in fines of tens or hundreds of thousands of dollars. The physicians were told to pay up immediately or face revocation of Medicare privileges. Some were turned over to the Office of Inspector General and prosecuted for fraud, and a few were imprisoned. Physicians in our community fought after paying these egregious assessments. After several years and $25,000 to 50,000 in legal fees, they all got their money back.

The Department of Health and Human Services, HCFA and the Office of Inspector General also went after other easily identifiable targets. There are real criminals who defraud government by fraudulent billing, but they are much harder to find. In the 1990's several “mafia” like organizations were very adept at setting up shop and billing Medicare and Medicaid and closing quickly enough to move on. The OIG chose to go after easier targets such as academic medical institutions, hospital chains, health insurance and managed care organizations, physician IPAs and individual hospitals.

They started out with $500 million in funding for personnel including 450 FBI agents. This effort is budget neutral and self-funding. All of the fines and settlements pay for next year's efforts. This enforcement bureaucracy is now up to a $1 billion budget, and it feeds like a parasite off of the continued billing activity of every type of provider of Medicare services.

But this is not the worst of it for physicians. Since the HIPAA law of 1996, “whistleblowers” are rewarded for turning in Medicare providers. The government spends millions of dollars training seniors to report on physicians or hospitals that seem to be doing something wrong. Even disgruntled colleagues can become whistleblowers. Of greatest concern to doctors is that employees are increasingly whistleblower complainants. Thus Medicare and federal regulation make potential enemies out of patients, colleagues and employees.

The whistleblower issue was recently reported in the Los Angeles Times in a story about the Kerlan-Jobe Institute in Inglewood , California . This is a well-known and long-established orthopedic and sports medicine practice. A whistleblower filed a complaint in 1998. As reported in the LA Times, this whistleblower had profited from a prior a complaint against an emergency medicine group. In this instance the whistleblower was evidently hired to provide training for billing staff regarding appropriate documentation for Medicare billing. This person documented the training and gathered evidence that the group was not always in compliance. The employee filed a whistleblower complaint and after hundreds of thousands of dollars in legal fees, Kerlan-Jobe finally settled for $2.6 million. $551,000 went to the whistleblower.

What physician wants to end his career with five years of federal litigation hanging over his head? What physician wants to worry about whether the next new Medicare patient or newly hired employee will create a tremendous legal problem, potential financial loss and the possibility of prosecution and imprisonment? It is little wonder that physicians want out of Medicare for this reason alone.

In addition, since the HIPAA law of 1996, there is an incredible increase in unfunded regulatory burden that a physician's practice must bear. The time needed to document office visits takes important and valuable time away from the interaction with patients during an office visit. The new “Privacy Regulations” which require endless forms to be filled out and restrict doctors and nurses from talking to one another about patients' problems have created an enormous burden of paperwork which has added nothing to the privacy of the medical record.

Added to this is the financial uncertainty of the reimbursement issues which have already been discussed. In the State of California there are tremendous small business burdens for private physicians. Just consider the workers compensation problem we now face.

All of these issues greatly reduce the job satisfaction and quality of life for physicians.

Slide #26

When physicians look ahead at what is going to happen to Medicare, it is clear that the future will be determined by how we deal with our currently commitments to a rapidly expanding entitlement population with too few resources to do so. The 76 million baby boomers will begin their retirement transition in 2010. In the next 20 years the Medicare population will almost double, the cost to maintain just the current level of services will almost triple, and the number of workers supporting each Medicare recipient will be cut almost in half. There is no doubt that reimbursement for services will have to be slashed and rationing will have to take place to meet this rapidly escalating demand.

Complicating all this is an already palpable physician shortage. A number of national bodies have already projected this, and conservatively it will be at least 15% by the year 2020. In our own community it is already a seller's market for physicians. This makes it much easier for a physician to limit his practice, particularly as regards participation in Medicare.

There is no doubt that we are going to spend much more for health care over the next ten to twenty years. The question is, who best to spend the money? There is nothing wrong with spending on healthcare at 15% of the GDP and increasing it to 18 to 20%. Those who object to this amount should remember what we spend on other components such as automobile and transportation services at 9% of the GDP. The real question is, do you want the government to decide how that money is spent on your behalf or do you want to control your own healthcare destiny?

Slide #27

As private physicians look ahead, they see nothing but more regulation. There are already 130,000 pages of federal regulation plus state laws, and this will only grow, probably exponentially. They see nothing but more risk with the criminalization of practice and the constant worry about whistleblowers. They see inevitably that there will be less reimbursement for their services. They see less job satisfaction, and they are running out of ways to adapt.

Slide #28

Physicians have adapted in a number of ways by changing their practice. The goal is to remain budget neutral by looking at what is reimbursed under Medicare and make appropriate business decisions.

One dramatic change is that physicians now support their specialty societies and the AMA primarily because they negotiate with Medicare to keep the fee schedules at their current level. Year to year Medicare threatens significant reductions in actual dollars for every procedure.

Many physicians have changed the nature of their practice and specialty. It is very difficult to find regular pulmonary doctors any longer after the audits of the 1990's. They have become allergists, hospitalists and sleep doctors. Ophthalmologists and head and neck physicians saw dramatic reductions in their reimbursement. They have added plastic surgery to their practices. One cannot find any pure neurosurgeons any longer. Those who do brain and spinal surgery are largely confined to academic training programs. Because of their tremendous malpractice costs and frequency of malpractice suits, neurosurgeons have transitioned into orthopedics.

Many physicians have changed the services they provide. In order to maintain higher patient volumes and thus steady incomes, physicians have added physician assistants or nurse practitioners. Primary care physicians have added many procedures to their office practice. Formerly they did office visits and blood work, but now they have added treadmill testing, Holter monitoring, x-ray procedures and ultrasound procedures. Cardiologists and oncologists have added expensive imaging to their practices including nuclear medicine, CT scanning and even PET scanning.

Slide #29

Physicians have reached outside of medicine to obtain income from a normal marketplace. Until the infamous STARK laws were passed, physicians could be part owners in ambulatory surgical centers which competed with hospital outpatient departments. However, physicians are now greatly restricted from doing business with one another or owning parts of outside medical enterprises.

Some practices incorporate new services into their offices. Some cardiology practices have cath labs in-house. There are specialty hospitals throughout the United States partly owned by doctors. Most of these are cardiology institutions. However, the new Medicare law has now put a moratorium on new specialty hospitals. Doctors are presumed to be involved in this for greedy reasons and not to improve the quality of care for their patients.

Still other physicians have gone into new businesses to maintain their income. We have physicians in our community who own restaurants. We have physicians who own golf shops, etc.

Other physicians have changed their mode of practice entirely. Some have gone to a cash for care model. SimpleCare started in Oregon and has practitioners throughout California . In this model of care patients pay directly with check or credit card. Insurance and Medicare have no place. Their fees are extremely low because their overhead is greatly reduced, not having to bill insurance companies or Medicare, nor comply with onerous regulation.

Still other physicians have transitioned to a subscription service model or a boutique practice. The most widely known of these is MDVIP, and there are two such practices in Los Angeles County . Typically a physician offers an array of services which include preventive examinations, same day appointments and open and available access to the doctor at all times. This may cost $1000, $2000 or more per year.

Slide #30

From the patients' point of view, one of the most important ways physicians have adapted is opting out of managed care and Medicare programs. Over the last decade most physicians in our community have opted out of HMOs. The market has contracted such that there are now really only two providers of HMO managed care in our area, and they are the Bay Group and UCLA.

In addition, a majority of APPA members have opted out of PPO's. Reimbursement rates have fallen so low that they very much resemble HMOs as far as payment goes. Yet, 60% of my patients have PPO managed care, some of which pay quite well to physicians outside of their contract network. Patients in our community are now used to paying a difference to see a physician who is accessible and will spend time with them.

Few physicians have opted out of Medicare participation, but I predict this will grow. This means charging the maximal allowable charge at the time of the visit and paying by check or credit card. Medicare is billed electronically, and the payment goes to the patient. If there is a problem with the billing, the issue must be settled between patient and Medicare. Larger institutions have taken this route. One of the Mayo facilities has dropped participation, and the House Ear Clinic in Los Angeles has dropped Medicare participation.

A much more common problem is that physicians have chosen to opt out of accepting new Medicare patients. As already stated, there is a relative lack of new physicians which will get worse. Most doctors are already busy and financially successful and want to limit their exposure to time-consuming and difficult Medicare patients who provide poor reimbursement for services rendered along with the risks of audits and criminalization. It is very difficult to find a new primary care physician for a Medicare patient these days. Only the younger doctors just starting their practice are willing to accept them. Seniors wanting access to the most experienced primary care doctors simply will not find it.

A few physicians have opted out of Medicare altogether. As of this date, in California approximately 250 doctors in all specialties have opted out. However, more and more physicians are learning about how to opt out and the economics of doing so. I predict that this will rapidly grow, especially for senior physicians who are already financially secure and who wish to limit their risk exposure to Medicare.

Unfortunately senior physicians are also pursuing a drop out strategy. Merritt Hawkins is a company which places physicians in job opportunities and did a survey in late 2003 of physicians over the age of 50. The question was asked “What will you be doing with your practice over the next one to three years?” The majority plan to greatly diminish the scope of their practice, change careers or retire. This unfortunate development will deny sick patients the talent of the most experienced and wisest of our physicians.

Slide #31

Unfortunately sick patients are no longer seen as a practice asset. The key financial equation which results in this tragedy is as follows. Physicians are trying to maintain revenue neutrality by changing their practices. Inevitably this leads to much higher overhead as they add new personnel, equipment and other expenses. This diminishes the relative value of direct patient care activity. If a primary care physician can get $437 from Medicare for an ultrasound procedure done in his or her office, the prospect of seeing the next time-consuming, complicated Medicare patient in follow-up for $31.50 is much less inviting. Sick patients are a burden to a practice, not an asset. This is the most perverse and tragic consequence of government interference in healthcare.

Slide #32

This dynamic has changed the way doctors organize their direct patient care activities. Full service physicians who used to provide care in the office and at the hospital now want to be only office doctors. Some turn over on-call access after 5 o'clock and on weekends to a hospitalist. Therefore, the patient can invest years of familiarity with a doctor, but when he or she is ill, they may be forced to seek services from a stranger at a time when they need that doctor the most.

Thirty minute office visits are now reduced to 5 minutes. Doctors who used to pride themselves on coordination of care for patients now only want to do episodic care. Five minutes, one problem, come back another day for your other problems. Sick patients are not a practice asset.

Slide #33

I will not belabor this, but patients get the idea. They find fewer physicians in their health plan, most of the physicians are in the same HMO groups. Appointment access is difficult, emergency access is difficult, appointments are too brief, and health issues are unresolved.

Slide #34

The physicians who have opted out of Medicare are in all specialties. It began with psychiatrists who are reimbursed almost nil for their services to patients over 65, but doctors in all specialties across the country have dropped out. Our busiest cancer surgeon in Santa Monica dropped out of Medicare. Our busiest and most successful orthopedist dropped out of Medicare last year. He is doing very well seeing fewer Medicare patients with lower overhead and none of the Medicare associated risks. Medicare patients are paying him directly for his services, and I would predict his financial situation is unchanged. He operates on fewer Medicare patients who pay him more for the privilege of his excellent services. In addition, ophthalmologists, dermatologists and other specialties in California have dropped out.

Opting out of Medicare for a physician is no easy task. A doctor cannot opt out for one patient at a time. This is unlike the system in Britain where a doctor can participate in the National Health Service program and also private care at another office every week.

Opting out of Medicare for a doctor has to be done for all Medicare patients and for two years. The Center For Medicare And Medicaid Services has to be notified. All patients have to be formally notified. Any Medicare patients wanting to see that doctor have to sign individual patient contracts which are spelled out by the government and are very specific. There are very specific rules and regulations, and any physician doing this must use consultants and attorneys.

Slide #35

As doctors look ahead, we see that we may have five to ten years of adaptation left. Doctors will add services, look to new income sources and opt out of government programs.

We expect to see more consolidation of managed care and GovernmentCare patient activity. The current providers of HMO managed care (the Bay Group and UCLA) will attract the pure PPO patients who do not want to pay outside their contracted physician lists. Ten to 15 years from now we will see the pure Medicare and MediCal patient base gravitating toward such groups.

We will continue to see deterioration of hospital services because they have no adaptation strategies left. They have been enslaved by government regulation and are the private partners of public government programs. Unless some alternative to the concept of a hospital for inpatient care can be created, there is no hope of regulatory relief for these institutions.

We will see outright rationing of Medicare and Medicaid services. It is already going on behind the scenes. There are limitations on frequency of blood testing, various imaging services, and great limitations on the ICD-9 code diseases for which a procedure is approved to be paid. We will see rationing far beyond what was considered the worst of the HMO abuses.

Perhaps most tragically, there is already declining innovation in medicine. Venture capital is needed to stimulate the development of new imaging modalities, pharmaceuticals and biologicals. With government regulation and payment restriction limiting potential profitability, venture capital will wander away and innovation will diminish.

Slide #36

Healthcare consumers will see more obvious segmentation of the physician market into those who practice in a private healthcare manner versus those who do GovernmentCare and managed care medicine.

We will see the emergence of consumer-driven healthcare. Thankfully, we already have employer-sponsored Health Reimbursement Arrangements (HRAs) which began a couple of years ago. This allows for employer-sponsored accounts in which the employer and employee can place pre-tax dollars. Individual insurance premiums for the employee and all other healthcare expenses are thus tax free.

The new Medicare Part D legislation also contains a provision for Health Savings Accounts. These new accounts are similar to the previous Medical Savings Accounts except all of the restrictions have been removed. They are already selling, and many feel they will be incredibly popular. All of you should learn more about these HSAs and encourage your children and grandchildren to take advantage of them. This will probably be their ticket out of the Medicare monopoly.

Thankfully we will see more independent and demanding patients. If the patient is the customer and in charge of the financial aspects of the relationship with physicians and hospitals, nothing but good can come of this.

We will see growth of private physician associations such as APPA. Healthcare consumers and patients will want to know where to go on the internet and in their communities to find physicians and hospitals which provide this sort of care. They will also organize their own private healthcare consumer organizations and marketplaces similar to those that already exist in Britain .

Slide #37

Politically the final battle for universal GovernmentCare is already upon us in California . This takes the form of State Senator Sheila Kuehl and her five year effort regarding SB1, the CaliforniaCare Bill. Her proposal would take all monies currently going to MediCal, all monies going into the state for Medicare, and all monies from employer-sponsored health benefit plans and turn these over to a new California healthcare agency and a healthcare czar. This agency would control everything about healthcare in this state.

At the federal level we will continue to see efforts at incremental expansion of federal Medicare and Medicaid programs. Most recently this has been the relatively unsuccessful SCHIP effort. This was a Medicaid-like program for uninsured children and their families. Like this program, most of these will be bottom-up plans.

Slide #38

Free market, private healthcare advocates such as myself have a common agenda for a better healthcare system. These advocates are in the insurance industry, consulting firms, think tanks and non-profit organizations. There are even a very small number of congressmen and senators who accept these ideas.

The essential features of a better healthcare system include viewing the role of government in a completely different way. GovernmentCare programs, including the Medicare and Medicaid monopolies and the government by proxy managed care programs should be consolidated and returned to their appropriate safety net role. Control of the patient experience should be returned to the patient and physician. Government and the employer should get out of the examination room.

To accomplish this we need to create a pluralistic market-based system. The American marketplace may have its faults, but it works better than any other for the delivery of goods and services in our land of liberty and freedom of choice. The marketplace is denigrated by those promoting more government interference, but it is enormously preferable to the current government-run program we suffer with now.

We need to expedite the return of real health insurance products. The managed care products we have now are defined benefit plans, very unlike the health insurance products we had up until the early 1980's. We need to expedite the growth of tax-advantaged, meaning tax-free, health insurance products and health savings accounts.

We need to encourage patients and physicians to opt out of GovernmentCare. We cannot return GovernmentCare to its appropriate safety net role without offering patients and physicians an alternative to opt into. This is what HRA programs and HSAs will provide for our children and grandchildren.

For more information about private healthcare and Medicare, please explore this website. There are extensive documents on Medicare including a Medicare Patient's Survivor Guide. Please feel free to contact us to request more information.