WHAT SECTION 4507 SAYS

Under Section 4507 of the Balanced Budget Act,⁵ any doctor is free to contract privately with a patient enrolled in Medicare, treat that patient on an independent basis outside of HCFA rules and regulations, and refrain from submitting any claims to Medicare for Medicare reimbursement.

However, there is a catch: A doctor who wishes to contract privately with a patient enrolled in Medicare Part B--the part that pays for physicians' services--must first sign an affidavit to that effect and submit that affidavit to the Secretary of Health and Human Services (HHS) within ten days. In the affidavit, the doctor will agree to remove himself from the Medicare program and refrain from submitting any claims for Medicare reimbursement for a period of two years. Section 4507 does not specify when a doctor must make such an election.⁶

Section 4507 also requires that the contract between doctor and patient must be written and signed. The patient must agree not to file a claim with Medicare and must pay 100 percent of the doctor's charge. The law thus allows the charges to be determined by a mutual transaction between doctor and patient in a free market, subject neither to Medicare's complex fee schedules for over 7,000 different medical treatments nor to its rigid price controls. Moreover, the private contract must disclose that neither Medicare nor the patient's Medigap policy--the insurance policy that most Medicare patients buy to cover the services that Medicare does not cover--will pay any part of the cost of the medical service.

Under Section 4507(3)(B)(ii), any doctor who enters into a private contract with a Medicare beneficiary must agree in the affidavit that he will not submit any claim "for any item or service" provided to "any Medicare beneficiary" during the mandatory two-year period. The House Ways and Means Committee staff and officials of the Clinton Administration have confirmed that this legislative language means that legal restrictions on private contracting in Medicare apply only to services covered by Medicare. The precise meaning of Medicare coverage, however, is still a matter of dispute.⁷

Under the terms of Section 4507(b)(5)(A), a Medicare beneficiary is any individual "who is entitled to benefits under part A or enrolled under part B." Part A of Medicare covers hospital services to the elderly and is financed by payroll taxes; Part B pays for physicians' services and is financed by a combination of general tax revenues and premiums paid by persons who enroll in the Part B program.⁸

Under Section 4507, the Secretary of HHS is to report to Congress in 2001 on the impact of private contracts on total federal expenditures, out-of-pocket expenditures by Medicare beneficiaries, and the quality of the care provided to patients under those contracts.

No matter how artfully official Washington and its allies attempt to defend the enactment of Section 4507, the result is clear: Most Americans over the age of 65 will not be able to spend their own money to secure the medical services or treatments currently provided by Medicare on terms mutually agreed upon with a personal physician of their choice outside of Medicare. The wall of personal liberty and privacy in the provision of health care has been breached by this unprecedented government intrusion.

CONGRESSIONAL CONFUSION
AND FEDERAL MISINFORMATION

In proceedings before the U.S. District Court for the District of Columbia in the case of United Seniors Association Inc. v. Donna Shalala, Kent Masterson Brown, consulting attorney for the United Seniors Association and a prominent expert on Medicare law, has characterized Section 4507 as

a clear statute. It says if a doctor wants to privately contract, that's fine, but he will have to get out of Medicare for two years. No matter what they say would be the legislative history. And I must say this was one of those items where I think everyone here agrees, it was inserted at the last minute. There were no hearings on this thing. What we have from the floor of the House and Senate are just totally conflicting things.⁹

Other experts are less charitable. The American Psychiatric Association describes the provision as "regrettably ill crafted," and the two-year opt-out as "ludicrous public policy on its face."¹⁰ John Hoff, an attorney and author of a new monograph on Section 4507,¹¹ argues that "Although the real world effect of Section 4507 is clear, the provision is genuinely confusing, both in concept and in detail; and it provides little meaningful guidance to doctors, patients, or even officials at HCFA."¹²

Even Members of Congress seem to be confused over its meaning.¹³ The debate on the Balanced Budget Act of 1997 includes no coherent explanation of why Congress adopted Section 4507. Various Members and congressional staff employees have released contradictory and erroneous information not only regarding the previous status of the law and the right of doctors and patients to engage in private contracts, but also over the current status of the Medicare law and how it is to be enforced and applied. And far too many Members, including those who want to reverse the current policy, persist in telling their constituents--erroneously--that Medicare law previously prohibited private contracts between doctors and Medicare patients.¹⁴

Nor is this confusion limited to Members of Congress and their staffs. As noted by the American Psychiatric Association, "statements by senior HCFA staff and successive Administrators have been rife with contradictions, with the unacceptable result that physicians--even when seeking to respond to the directives of their own patients--are left completely vulnerable to the whims of individual Medicare carriers."¹⁵

Some recent official communications on Section 4507 are nothing short of bizarre. For example, according to HCFA's January 1998 Program Memorandum on Medicare private contracts:

If an "opt out" physician/practitioner violates his or her agreement to not file claims to Medicare (except for emergency claims or urgent care services furnished to a beneficiary with whom the physician/practitioner has not entered into a private contract) he/she must thereafter submit claims for all services to Medicare beneficiaries (for which no Medicare payment may be made) and must abide by limiting charge rules and regulations (which the carrier must enforce) for the duration of the "opt out" period.¹⁶

In other words, the scofflaw physician henceforth would be required to file Medicare claims the admitted purpose of which is to secure absolutely no Medicare payment, and Medicare's price controls are to be applied and enforced on a price that does not even exist.

Since passage of the Balanced Budget Act of 1997, disputes have arisen over a variety of questions, including the limitations on payments to physicians who treat emergency cases, even if they have withdrawn from Medicare; the status of Medicare patient privacy and its reach and applicability beyond certain politically sensitive conditions explicitly noted by HCFA, such as AIDS or mental illness; the use of "advanced beneficiary notices" for services that may not be covered by Medicare; the impact of Section 4507 on the status of Medicare-eligible persons who have withdrawn voluntarily from Medicare Part B; and the legal status of private contracts for "otherwise covered" Medicare services distinct from categorically "non-covered services," such as eyeglasses or custodial care.

The need to resolve these ambiguities has led to congressional action. In the fall of 1997, Senator Kyl put a "hold" on the nomination of Nancy-Ann Min DeParle as HCFA Administrator and sought specific assurances from the Clinton Administration that the statutory language would be interpreted and applied by HCFA in ways less damaging to the interests of doctors and patients.¹⁷ Representative Benjamin Cardin (D-MD), responding to claims that the new restriction exceeded covered services in Medicare, introduced the Medicare Private Contracting Clarification Act of 1998 (H.R. 3259) to make it clear that no private contract, as specified in Section 4507, would be required for services Medicare does not cover.

In response to inquiries raised by Senator Daniel Patrick Moynihan (D-NY), the U.S. General Accounting Office (GAO) issued a report on the contentious issues raised by both proponents and opponents of the enactment of Section 4507.¹⁸ Curiously, however, on certain crucial policy issues the GAO simply repeats the official views of HCFA--precisely the views that are at issue in the current controversy.

WHAT THE FEDERAL JUDICIARY
SAYS SECTION 4507 MEANS

If the Constitution includes, as the U.S. Supreme Court says it does,²⁰ a basic right to privacy, ordinary Americans would doubtless find it hard to imagine a more serious invasion of that privacy than Section 4507's limitation on private agreements between doctors and patients who make transactions outside of Medicare.

In 1997, Medicare patients and members of the United Seniors Association filed suit asking the U.S. District Court for the District of Columbia to strike down the provision as a violation of basic rights to liberty and privacy under the Constitution. In his decision in United Seniors Association Inc. v. Donna Shalala (1998), U.S. District Court Judge Thomas F. Hogan stated:

The Court does not pass judgment on Congress's wisdom in passing Section 4507. The Court's role here is solely to determine whether the United States Constitution confers a fundamental right on individuals to contract privately with their physicians. The Court finds that it does not.²¹

In defense of Section 4507, lawyers for the Clinton Administration insisted that senior citizens did not have a fundamental right to "autonomous decision-making" (the term of legal art used by lawyers concerning matters of personal liberty and privacy) in choosing a private contractual relationship with their doctors. The U.S. District Court for the District of Columbia thus agreed with the Clinton Administration's interpretation of the law, leaving senior citizens with no constitutional right to enter into private agreements with their doctors outside of the Medicare system.²²

At the same time, Judge Hogan noted that, contrary to the misleading claims of Section 4507's congressional supporters, the application of Medicare law by HCFA will further restrain patient choice of doctors: "The Court is concerned, however, that the regulations and interpretations of HCFA further limit patients' access to physicians of their own choosing."²³

Judge Hogan also noted that, under existing circumstances, current congressional and Administration policy ensures that senior citizens have no practical alternative to the Medicare system: "Medicare is, in effect, the only primary health insurance available to people over age 65. No private health insurance companies offer `first dollar' insurance to this group; they offer only supplemental insurance."²⁴ In other words, as Senator Kyl has argued, for today's senior citizens, "it's either Medicare or no care."²⁵

The United Seniors Association, a conservative senior citizens group, joined by the American Civil Liberties Union of the National Capital Area and a number of medical and patient groups, has appealed the case to the U.S. District Court of Appeals for the District of Columbia Circuit.²⁶ In their amicus brief, the appellants state:

The right of personal autonomy involved in this case--the right of a competent individual, in consultation with a licensed physician, to obtain desired medical services at his or her own expense--is fundamental. It has been recognized historically and without dissent, as Appellants' brief amply demonstrates. And it is recognized in all current law (with the sole exception of the statute at issue) and contemporary morals.²⁷

Shortly before the U.S. District Court decision, the Senate adopted a resolution that in principle supports the right of doctors and Medicare patients to make private agreements. Offered by Senator Kyl during consideration of the 1999 budget resolution, this legally non-binding resolution specifies that "It is the sense of the Congress that seniors have the right to see the physician of their choice, and not be limited in such a right by the imposition of unreasonable conditions on providers who are willing to treat seniors on a private basis."²⁸

After a heated floor debate on March 31, 1998, the Kyl resolution passed the Senate by a vote of 51 to 47. So far, the House of Representatives has not adopted a similar resolution.

PROPOSITIONS WASHINGTON
WANTS RETIREES TO ACCEPT

The rationales for the new Medicare restrictions advanced by official Washington since the enactment of Section 4507 involve a number of questionable, and at times seemingly contradictory, propositions. For example:

PROPOSITION #1: Americans 65 and over who are enrolled in Medicare have no constitutional right to privacy in their relations with their physicians unless they are getting an abortion or securing birth control services.

Lawyers for the Clinton Administration argue that seniors represented by the United Seniors Association are wrong, both in asserting that private agreements with doctors constitute a liberty protected by the Constitution and in asserting a privacy right in such agreements that is protected by the Constitution.

The Administration's lawyers argue that the privacy right concerns two kinds of personal interests: avoidance of the "disclosure of personal matters" and "independence in making certain kinds of important decisions";²⁹ but "Neither interest is implicated here.... The right to autonomous decision-making applies only in certain limited contexts involving marriage, contraception and abortion, family relationships, child rearing and education."³⁰ The U.S. District Court agreed.

The upshot, then, is that constitutionally protected transactions between doctors and patients for health care services are restricted to politically correct conditions like abortion and contraception, but not cancer screenings or urological consultations.

PROPOSITION #2: Medicare patients are now told that they have always had the right to withhold authorization for the submission of Medicare claims, invoking confidentiality or privacy as a reason for doing so, but the Medicare bureaucracy has no obligation to notify them of this right.

As noted by the American College of Physicians, "There is no official, systematic method for educating physicians and patients on Medicare payment and other rules."³¹ Worse, the record shows that the Medicare bureaucracy and its allies say different things at different times and, in some crucial circumstances, say nothing at all.

In 1997 briefs filed with the U.S. District Court in Washington, Clinton Administration lawyers denied that seniors had a constitutional right to liberty or privacy in their relationships with their physicians and repeated the view that physicians treating Medicare patients must submit a claim to Medicare for every service rendered to a patient, without exception.³² Then, toward the close of 1997, the Administration's policy team started to carve out a "privacy exception" for certain stated conditions, notably AIDS and mental illness.

This privacy exception had not been mentioned in previous Administration legal presentations. It first surfaced in a December 1997 circular to Medicare carriers, listing 22 questions on the meaning of Section 4507. In response to Question 21, HCFA says that there are "some circumstances" when a physician who remains in Medicare may refrain from sending a bill to the Medicare program if the patient does not want his illness or medical condition exposed. ³³ More formally, HCFA Administrator Nancy-Ann DeParle stated in February 1998 Senate testimony that

A beneficiary may, in some situations, refuse to authorize the release of medical information needed to submit a claim. On this case, a physician who remains in Medicare does not have to submit a claim for a covered service provided to a Medicare beneficiary. Examples would be when the beneficiary does not want information about mental illness or HIV/AIDS to be disclosed to anyone. I want to clarify that a physician will not be subject to penalties for failing to submit the claim. The Balanced Budget Act did not change this aspect of Medicare. It was the law a year ago and it is still the law today.³⁴

Needless to say, nothing in Section 4507--the law controlling Medicare private contracting--provides any exception for patient privacy or confidentiality for AIDS, mental illness, or any other medical condition. Moreover, if a privacy or confidentiality exception did exist somewhere in the Medicare law before the enactment of Section 4507, HCFA has been conspicuously silent about it.³⁵

The GAO, for its part, simply repeats HCFA's position on this question³⁶ without even noting that HCFA has changed its position that a doctor is legally required to submit a Medicare claim for every instance involving treatment of a Medicare patient. The GAO, moreover, does not cite any statutory basis for such an exception.

The newly discovered privacy exception must have been a surprise even to the most vocal political supporters of the new Medicare restrictions. In fact, the record of many years, including previous litigation on the subject, shows that different ranks of HCFA officials affirmed repeatedly that doctors, without exception, were required to submit claims to the Medicare bureaucracy every time they treated a Medicare patient.

The list is impressive.³⁷ For example, on January 7, 1992, John Delaney, Chief of the Policy and Technical Assistance Branch of Medicare, insisted:

There is no federal requirement that a physician must treat Medicare patients. However, if a physician does treat a Medicare patient, all Medicare rules, regulations and laws are applicable. For example, the Omnibus Reconciliation Act of 1989 requires physicians to file Medicare claims on all services provided to Medicare beneficiaries. This requirement applies to physicians who do not accept assignment as well as to those who do accept assignment.³⁸

If a privacy exception to claims submission for Medicare beneficiaries always existed in Medicare law, then HCFA officials might have been expected to publicize such an important exception before the controversy erupted on Section 4507. But they did no such thing. There was no regulation; there was no guideline. Nor is there any evidence that HCFA ever notified Medicare patients of their long-standing right to pay a doctor with their own money and refrain from submitting a claim because of privacy or confidentiality concerns. Over the years, in federal courts and in communications with carriers, HCFA insisted on the usual submission of claims.

Section 4507, as noted, contains no privacy exception. From that standpoint, therefore, it makes the situation worse. In fact, given the breadth of the reporting requirement imposed on the Secretary of Health and Human Services under Section 4507, the American Psychiatric Association observes that "the specifics of the reporting requirement are so sweeping that we believe the requirement would require extensive violations of patient confidentiality."³⁹

Moreover, even if one assumed that Congress at some point had enacted a privacy exception to Medicare claims submission, one would have to wonder why it has shown such indifference to HCFA's failure to publicize and enforce so crucial a patient protection. This indifference is all the more curious when one considers the official threats of sanctions made against doctors who wanted to contract privately with patients, especially since the Stewart v. Sullivan case in 1992.⁴⁰

HCFA's newly discovered privacy exception to the submission of Medicare claims is good public policy, but it would be even better if Congress were to ground it solidly in statute rather than leave it as a desperate assertion by an embattled bureaucracy responding to angry senior citizens. Even so, however, the right of private contracting is a fundamental liberty, and its justification should not be limited narrowly to privacy concerns.

PROPOSITION #3: Section 4507 of the Balanced Budget Act of 1997 is a "liberalization," not a restriction, of private contracting in Medicare.

When Section 4507 was passed, various Members of Congress defended their handiwork as a "liberalization" of personal choice and professional freedom in Medicare. For example, the House Republican Conference, in a set of talking points on Section 4507, declared that "The Balanced Budget Act loosens federal red tape on private contracts. The Balanced Budget Act gives seniors more choices and physicians more freedom. Our bill allows physicians to opt out of the Medicare system and set their own fees and rates if they choose to do that."⁴¹

Similarly, in oral argument before the U.S. District Court for the District of Columbia, lawyers for the Clinton Administration initially described Section 4507 as a "liberalization" of Medicare law.⁴² John Rother, legislative Director of the American Association of Retired Persons (AARP), argues that Section 4507, rather than weakening Medicare beneficiaries' right to contract privately with their physicians, actually expands that right.⁴³

In fact, however, the notion that Section 4507 liberalizes the right of private contracting in Medicare is nonsense. Judge Thomas Hogan's decision in United Seniors Association Inc. v. Shalala certainly did not portray Section 4507 as an expansion of the right of contract. Moreover, during oral argument in the case, when Judge Hogan noted that the provision was so narrowly drawn as to be "meaningless," the Clinton Administration's trial attorney, Anthony J. Coppolino, responded, "I concede that the provision was gutted in conference to make it probably not very useful...."⁴⁴ As Judge Hogan remarked in his ruling, "Both parties also substantially agree that the two year restriction on physicians who enter such contracts represents a substantial barrier to the receipt of contracted services."⁴⁵

HCFA's preliminary 1998 report on the infinitesimal number of doctors willing to contract privately under Section 4507 confirms the true intent of Section 4507: to make private contracting between doctors and patients in Medicare all but impossible.

PROPOSITION #4: Private contracts between doctors and Medicare patients were always illegal even if they were not against the law.

Americans think that they live in a free society under a system of limited, constitutional government. In practice, this should mean that Americans, being a free people, enjoy the liberty to engage in private activity and otherwise pursue happiness for themselves and their children unless there is a law prohibiting such activity.

But official Washington and its allies have a different standard when it comes to private agreements between doctors and Medicare patients. "As an initial matter," argue lawyers for the Clinton Administration, "the fact that the Medicare Act did not expressly `prohibit' private contracts is of no significance. Congress need not add a provision to every statute it passes stating that its requirements may not be circumvented by private agreement."⁴⁶

In the sphere of Medicare policy, the tacit assumption is that one may engage in private transactions outside of the program only if federal officials permit one to do so. According to the staff of the House Ways and Means Committee, "Prior to the Balanced Budget Act of 1997, private physician contracting was not allowed."⁴⁷ Likewise, John Rother and the AARP have emphasized in communications to AARP members that until the passage of Section 4507, senior citizens had never been permitted to contract privately for services covered by Medicare.⁴⁸

The truth, however, is that before the enactment of Section 4507, there was nothing to forbid private contracting between doctors and Medicare beneficiaries: "Before the enactment of the BBA," observes the GAO, "Medicare law did not expressly prohibit private contracting between physicians and beneficiaries."⁴⁹ HCFA simply took the position that they were illegal.⁵⁰

HCFA's attempt to outlaw private agreements in Medicare was a creative effort to twist the technical statute governing Medicare claims submission requirements into a far-reaching federal policy forbidding private transactions between doctors and patients outside of Medicare.⁵¹ But, as Senator Kyl argued in the summer of 1997, Congress never intended that senior citizens be prevented from spending their own money on medical services provided by physicians of their choice.

This, in substance, was also the view of the federal judiciary. In Stewart v. Sullivan, the first major federal court proceeding on the subject, Judge Nicholas Politan dismissed the case brought by Dr. Lois Copeland and five of her elderly patients, not because their concerns or interests were trivial, but because the alleged policy forbidding them to contract privately did not exist either in law or in regulation.⁵²

Had HCFA truly believed that there was an existing privacy or confidentiality exception to the submission of claims, it could simply have notified the plaintiffs and saved the taxpayers the expense of unnecessary litigation. Instead, it continued to threaten doctors with sanctions and tried to seize upon any legislative reed, no matter how thin, to make a case against private contracting.⁵³ However, it always stopped short of issuing formal regulations, subject to formal notice and comment under the Administrative Procedures Act as well as a renewed legal challenge by the plaintiffs in the original Stewart v. Sullivan case. Then, with the enactment of Section 4507, HCFA's previously nonexistent "policy" became law.

PROPOSITION #5: The freedom to spend one's own money on medical services outside of Medicare depends not on federal law or regulation associated with that law, but on what HCFA bureaucrats say in Carrier Manuals.

"In 1993," according to the staff of the House Ways and Means Health Subcommittee, "HCFA issued Carrier Manual instructions prohibiting private contracting."⁵⁴ Similarly, both the House Republican Conference and the Clinton Administration's lawyers have cited Section 3044 of the 1993 Carrier Manual to demonstrate HCFA's intent to prevent private agreements in Medicare.⁵⁵ (The widely cited section, incidentally, contains no exceptions for Medicare claims submission for reasons of privacy or confidentiality in treatment of AIDS or mental illness or any other condition.)

In Stewart v. Sullivan, Judge Politan stated that the alleged federal policy forbidding private contracts between doctors and Medicare patients existed neither in law nor in regulation. In the wake of that decision, HCFA did not recommend any legislation to restrict private contracting and did not promulgate any regulations to enforce such a restriction. Instead--in a process that avoids the public notice and comments on regulatory initiatives required by the Administrative Procedures Act--it amended its carrier manual (instructions to Medicare carriers) to communicate its institutional opposition to private contracting.

Carrier Manual instructions, however, are not legally binding. In other words, before 1992, there was no policy forbidding private doctor-patient arrangements.⁵⁶ Then, after 1992, doctors and patients in the Medicare program were subject to HCFA "policies" that were of no legal force or effect.

On October 15, 1991, two years before the issuance of Carrier Manual Section 3044 and one year before Stewart v. Sullivan, HCFA Administrator Gail Wilensky stated: "In the rare event, however, that a patient, for his or her own reasons, and entirely independently, chooses not to use Part B coverage, the law does not require the submission of a claim by the physician."⁵⁷ Wilensky's reading of the law was compatible with Judge Politan's finding that there was no existing federal policy against private contracting between doctors and Medicare patients.

Again, on August 4, 1995, two years after the issuance of Carrier Manual Section 3044, Thomas A. Ault, Director of HCFA's Bureau of Policy Development, stated that "if the beneficiary chooses to withhold a claims authorization for his own reasons, entirely free of any pressure from the physician, the Medicare program recognizes that the physician has no right or duty to submit the claim on the beneficiary's behalf."⁵⁸

Despite repeated requests to HCFA by Heritage research staff for any official notices to beneficiaries or physicians describing such options, however, no such documents have been forthcoming.

PROPOSITION #6: HCFA has authority to impose rules and regulations not only on transactions between doctors and patients within Medicare, but also on transactions that take place outside of Medicare.

Americans might disagree with specific Medicare policies, but they would not challenge the right of Congress and the federal bureaucracy to make rules and regulations governing the financing and delivery of medical services within the Medicare system, including the statutory denial of outpatient prescription drug coverage and catastrophic coverage, the limitation of medical services, or the outright denial of a growing number of medical claims that bureaucrats think are "unnecessary or inappropriate."

Most people take for granted the fundamental distinction between what is public and what is private, but this commonsense distinction does not apply to Medicare. As noted, HCFA's traditional view is that all claims must be submitted for all medical services in all instances. Even if one were to accept in good faith the agency's privacy exception for someone who does not wish to submit a claim and wants to pay the doctor outside of Medicare, official Washington says the system's price control regime would still apply. It would apply even if the doctor wanted to charge the patient less than the Medicare charge, or even if the doctor wanted to charge the patient nothing at all as an act of charity or personal friendship. As the GAO reports:

Without the patient's authorization, the physician cannot submit the claim. Medicare's limiting charge amounts still apply, however, and cap the amount the physician may charge. Because Medicare pays no part of the charges, the beneficiary is fully responsible for paying for the treatment up to the limiting charge.⁵⁹

Private transactions in health care, in other words, are legally permitted only for Americans below age 65 who are not disabled. Thus, Congress has created a unique program, run by an arbitrary bureaucracy, that regulates not only transactions that take place within it, but also transactions that take place outside of it.

Nevertheless, the fact remains that the Medicare law contains no explicit requirement that Medicare's price controls be applied to transactions between doctors and patients outside of the Medicare system. This is merely one more creative HCFA interpretation designed to expand the agency's power.⁶⁰

PROPOSITION #7: The rules governing doctors in Medicare should be just as restrictive as the rules governing doctors in employer-based HMOs or managed care networks.

Americans might think that the professional independence and integrity of the medical profession, just like patient choice of doctors, health plans, or medical treatments, is a positive good that federal policymakers would wish to preserve and promote.

Not so. Some of the very Members of Congress who condemn existing restrictions on employer-based health insurance, undercutting the professional freedom of doctors and the choice of patients, will go so far as to cite the practices of employer-based insurance as a justification--or even a model--for restrictions on doctors and patients in Medicare. During the March 31, 1998, Senate debate on the Kyl resolution, Senator Paul Wellstone (D-MN) drew exactly such an analogy:

Take the Kaiser Plan. It is a well known, managed care plan. You join the Kaiser Plan and you are going to pay a given fee, the enrollees pay a given fee. Can you imagine what it would be like if all of a sudden doctors in the Kaiser plan could decide on their own, based upon what particular symptom they were seeing, that they would charge more for service? You join the plan just like people join Medicare.⁶¹

Officials of the American College of Physicians claim that private contracting between doctors and patients is incompatible with what they see as a desirable policy of promoting managed care in Medicare:

The ACP is also concerned that private contracting runs counter to the incentives of the Balanced Budget Act to encourage use of managed care and to use health resources economically. Under the Kyl bill, any managed care enrollee could pay an outside physician separately for a service under a private contract, a service which already has been actuarially factored into the managed care capitated payment.⁶²

Spokesmen for the AARP worry that if Medicare patients have the right to engage in private contracts, they will be able to get out of the new HMO plans for specific medical services and undermine HCFA's existing payment system for HMOs:

The capitated payments Medicare makes to HMOs and the new Medicare Choice plans include funds to cover physicians services. Yet if physicians are allowed to privately contract with beneficiaries in these plans, the plans would be able to keep the funds for services not provided by the plans, but which beneficiaries paid for under private contracts.⁶³

Moreover, notes the AARP, a senior citizen allowed to go outside of HMOs most likely will pay a doctor a different amount for a medical service than the amount dictated by the HMO plan or the government: "This practice essentially would deny Medicare beneficiaries a protection enjoyed by millions of workers and their families."⁶⁴

Of course, as the national media report, a great many Americans would be quite happy to be free of HMO "protections," now so widespread in restrictive employer-based health insurance. But if senior citizens feel it necessary to get out of HMOs to purchase the services they want, and if HMO use declines, there is no reason why Congress cannot simply adjust HMO payments accordingly, recoup any "windfalls," and save the taxpayers even more money. In any case, good HMOs in Medicare should not have to worry about serious inroads from patient choice through private contracting.

PROPOSITION #8: The Balanced Budget Act's private "Medicare Choice Plans," including medical savings accounts (MSAs), are private in name only.

Among the most intriguing issues to arise during the debate on Section 4507 is the provision's likely impact on the status of medical savings accounts, the new tax-free accounts available to a limited number (390,000) of Medicare enrollees. According to the House Republican Conference, for example,

The legislation makes quite clear that the private contracting and Medical Savings Accounts options are separate and distinct. MSAs expand patient choice for seniors, and allow doctors and patients to privately negotiate whatever reimbursement rate they wish for any medical service.⁶⁵

In other words, the MSA is a vehicle for a private contract: a free-market transaction. Its very purpose is to maximize freedom of choice for doctors and patients.

But Section 4507 does not allow that maximum freedom. If a Medicare patient wants the special services of a physician who has signed an affidavit to contract privately and drop out of Medicare for a period of two years, that doctor may not treat that Medicare patient and be paid, even if that patient is enrolled in an MSA plan. "Physicians will be able to opt out of Medicare, set their own rates, and operate independent from HCFA," according to the staff of the House Ways and Means Health Subcommittee. "However, when a physician makes this choice, he is required to remain out of the Medicare program for two years. That includes Medicare fee for service, HMOs, PSOs, and MSAs."⁶⁶ HCFA is responsible for finalizing regulations in this area.⁶⁷

Americans can be excused for finding the logic of the congressional argument hard to follow: For a doctor to contract privately with a Medicare patient is acceptable only if the doctor willingly gives up his right to contract privately with the Medicare patient enrolled in an MSA plan. Thus, what appears to be an opportunity for private contracting becomes a way to restrict private contracting. Regardless of congressional rhetoric, the so-called private options in the Medicare Choice system appear to be private in name only. They really are new vehicles for congressional expansion of HCFA's already enormous regulatory authority into the new territory of private health insurance.

PROPOSITION #9: The plain language of the law is to be applied and obeyed except when it comes to Section 4507.

Before the enactment of Section 4507, HCFA said that a Medicare patient could contract privately with a doctor if that patient were to get out of Medicare Part B and give up all coverage under Medicare Part B. Since there is no viable private insurance market for senior citizens outside of Medicare, however, the effect of this penalty is draconian. As Judge Politan noted in Stewart v. Sullivan, this "either/or" requirement constitutes a real harm to Medicare patients, and thus gives them standing to sue the federal government.⁶⁸

Once again, it should be noted that there is not now, and there was not then, any specific requirement in the Medicare law that forced a person to drop Medicare coverage; HCFA simply used this notion as a weapon in its campaign against private contracting. Needless to say, there is no evidence that HCFA ever notified Medicare beneficiaries that giving up Medicare Part B was the price they had to pay for engaging the services of a doctor outside of the Medicare system.⁶⁹

Section 4507 is remarkably restrictive, but HCFA is trying to interpret it in a way that makes it more acceptable to retirees, taxpayers, and Members of Congress. For purposes of the restrictions on private contracting, for example, a Medicare beneficiary is defined as any person who is enrolled in Medicare under Part A, which covers hospitalization, or Part B, which covers payments to doctors. The language of the statute makes it plain that the restrictions on private contracting apply even to patients who are not enrolled in Part B.

Thus, anyone who dropped out of Part B would still be a Medicare beneficiary and therefore could not be treated privately by any doctor who signed the government's affidavit and dropped out of Medicare for two years. Moreover, no physician treating such a patient could submit a bill to Medicare on behalf of a patient who is not enrolled in Part B and thus is no longer eligible for Part B coverage; if a doctor did submit the bill to Medicare, he could be in violation of the False Claims Act or the ominous fraud statutes.⁷⁰

Yet HCFA says that the restrictions on private contracting will only apply to Medicare patients enrolled in Part B.⁷¹ It is hardly surprising that even Members of Congress--the very people responsible for passing the law in the first place--have been saying different things to different affected constituents.⁷²

THE HIDDEN ASSUMPTIONS

The real debate over Section 4507 is not about protecting vulnerable senior citizens from predatory physicians; it is about power and control. The strongest congressional supporters of the new Medicare restrictions invariably are the most prominent advocates of a single-payer, government-run health care system. Under such a system, the government would control not only the financing, but also the medical benefits available to American citizens. What patients personally want and what doctors professionally can give would be subordinated to the rules of the system.

Thus, if one examines the arguments for the new Medicare restrictions, they are logically indistinguishable from arguments against any free-market transactions in the health care system. For example:

• Without these new Medicare restrictions, doctors as a class, unlike other classes of professionals, cannot be trusted to deal honestly with elderly patients. The tacit premise is that doctors, as a class of professionals, will take advantage of the elderly, who somehow are uniquely vulnerable to the machinations of greedy doctors. For example, Representative Fortney "Pete" Stark (D-CA) says that the campaign to restore private contracting in Medicare "is pure greed wrapped in the flag of freedom."⁷³ Similar accusations are leveled by supporters of the new restrictions outside of Congress. Taxpayers should note that advocates of these restrictions do not advance any similar argument against senior citizens dealing directly with any other class of professionals--especially lawyers.

In 1997, federal investigators estimated that about $23 billion (about 14 percent of all Medicare expenditures) is lost annually to waste, fraud, and abuse. Every penny is lost within the confines of Medicare's inefficient, outdated, third-party contract payment system, which now processes over 800 million claims per year. The way this system is organized virtually invites serious problems, although it is not always clear whether unjustified payments are due to genuine errors or outright fraud.

Recently, the inspector general (IG) of the Department of Health and Human Services conducted an audit of 8,048 Medicare claims filed in 1997 and found that 1,907 of these claims did not comply with Medicare rules and regulations. On closer examination, the IG found that over half of these problems were due to "inadequate documentation" or "coding errors." Linda Ruiz, a top HCFA official, has conceded that the federal government does not know how many of the 1,907 claims were fraudulent.⁷⁴ In sharp contrast to this wasteful Medicare structure, a radically different system based on the direct and open exchange of value for money between doctors and patients in a free market is the least susceptible to fraud of any financing arrangement.