Setting Priorities

The New York Times published a blockbuster series of articles this week, exposing the astonishing corruption in New York State’s Medicaid program. Some highlights:

  • A Brooklyn dentist — who has since been indicted — billed for 991 fillings, cleanings, and other dental procedures in one day in 2003, costing Medicaid a total of $63,967. Her total Medicaid take that year: $5.4 million.

  • The state paid $316 million for private ambulance transportation for Medicaid patients – paying up to $36 for a trip that would cost $2 for a bus ticket in the city that has the country’s best public transportation system. The reason: “It’s the old people. They want to come every day because they’re bored at home,” one official told the Times.

  • Of the 400 million claims that New York Medicaid paid last year, regulators uncovered just 37 cases of suspected fraud. Yet experts estimate that at least 10% and likely much more of the $45 billion the state spends on Medicaid is stolen or wasted.

It was shocking, but not surprising, then, to learn that the average cost per Medicaid patient in the state is $10,600 a year. That’s enough to buy a very good private health insurance policy even in New York’s incredibly expensive market.

The series got the attention of three-term Gov. George Pataki who quickly established an independent inspector general to track fraud and abuse in the state Medicaid program. And, not to be outdone, Attorney General Eliot Spitzer called for new legislation to help him prosecute Medicaid fraud.

Medicaid has too long been at the bottom of the priority list for policymakers and investigators. This series makes it very clear that it’s time to move it to the top.


We sponsored a briefing on Wednesday for congressional staffers on the on-going controversy about specialty hospitals, with more fireworks than we have seen at a Capitol Hill briefing in a long time.

You know the issue: In 2003, Congress imposed an 18-month ban on development of new physician-owned specialty hospitals, the majority of which provide cardiac or orthopedic care. The moratorium expired on June 8 of this year, but Finance Committee Chairman Chuck Grassley and others are pushing legislation to continue the ban.

Dr. Tom Coburn, the newly-elected senator from Oklahoma, was the first speaker, wearing his hats both as a legislator and physician. He said that quality patient care must come first, and many doctors prefer to practice in specialty hospitals because they believe they can provide better care. “Competition helps to lower costs and improve quality, in health care as in the rest of the economy,” he said.

Harvard Professor Reggie Herzlinger, the star of the consumer-driven health care movement, stressed that specialization is key to productivity growth and that ownership by experts is key to innovation. Other speakers used analogies from telecommunications, retailing, and automobiles to stress the value of competition and specialization.

They targeted Medicare’s system of price controls as a key driver for distortions in the health sector and called instead for a system of market pricing to determine whether there is a place for specialty hospitals. “In a free market, suppliers succeed because they are productive, not because a third party technocrat has mistakenly set their prices too high,” Herzlinger said.

Kelby Krabbenhoft, president and CEO of the Sioux Valley Hospitals and Health System in South Dakota, strongly criticized specialty hospitals, arguing that doctor-owners of these facilities are harming community hospitals by skimming the most profitable patients.

Further, he said, specialty hospitals have a built-in conflict of interest. “Physicians control admissions and leverage that power for personal financial gain,” Krabbenhoft said. “People should ask whether they need this procedure, or whether the doctor needs to make his yacht payment.”

Then the sparks really began to fly. Herzlinger challenged Krabbenhoft’s contention that consumers are ignorant, must rely completely on the advice of their physicians, and are unable to make their own choices. “Buyers who don’t know a piston from a valve can be effective buyers because of Consumer Reports and J.D. Power,” she said. “And empowered consumers could make the same choices about their health care and health insurance purchases.”

She said that extending the ban on specialty hospitals would “strangle an innovation that holds great promise for productivity gains in health care.”

Thanks to Al Dobson of the Lewin Group, Professor David Hyman of the University of Illinois College of Law, and Harvey Yampolsky of Arent Fox for their insights and information as well. The presentations and the agenda are available at

Grace-Marie Turner


  • The promise of personalized health care
  • Senate panel endorses drug bill
  • Health care at the swipe of a card
  • Health care spending accounts
  • Canadian health care and taxes
  • Payments for prescription drugs under Medicaid

Authors: Christina Sochacki and Robert E. Moffit, Ph.D.
Source: The Heritage Foundation, 07/20/05

Today’s health care financing arrangements must be changed for the promise of personalized health care to be fulfilled, write Christina Sochacki and Bob Moffit of The Heritage Foundation. As medicine becomes more personalized, it will be important for people to be able to choose their health plans and to have control over the terms and conditions of their policies. “Medical professionals are developing the capacity to provision personalized care based upon genetic and personal characteristics.” Recent FDA approval of the drug BiDil to treat congestive heart failure in African Americans “is only the beginning of personalized medicine,” they write. African Americans on BiDil showed a stunning 43% decrease in the risk of mortality from heart failure. But they warn that “while science and medicine are forging ahead, the health insurance market is lagging.”
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Author: Bart Jansen
Source: Portland Press Herald, 07/22/05

The Senate Commerce Committee on Thursday approved by a vote of 13-8 amendments that would allow prescription drug importation from abroad, over the vehement objections of Chairman Ted Stevens. The measure was attached to the Federal Trade Commission Reauthorization Act. The bill is now entangled in the arcane jurisdictional battles in the Senate: “The problem is that the Health Committee has jurisdiction over the drug bill, not the Commerce Committee,” the Press Herald reports. Stevens said he would block the bill from reaching the floor “rather than allow what he called an unrelated drug provision?But supporters argued that they were merely forcing Senate Majority Leader Bill Frist, R-Tenn., to schedule a separate floor vote on the drug legislation. Frist, a doctor, has resisted such a vote, citing safety concerns about imported drugs.”
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Author: Jennifer A. Kingson
Source: The New York Times, 07/16/05

“The paper-pushing method of paying medical bills, which has long been fairly resistant to the electronic age, is about to be challenged as new payment options like health savings accounts and prepaid medical cards gain wider acceptance in the workplace,” reports The New York Times. HSAs and other consumer-directed products “represent a philosophical shift toward consumer-directed health care, with people taking a more active role in supervising their medical treatments and benefits,” according to the article. A number of financial institutions are offering consumer-directed products, including J.P. Morgan Chase, which has opened 40,000 HSA accounts, and Exante, a bank started by UnitedHealth Group, which has opened 44,000 accounts. Although these products are gaining in popularity, polls by Watson Wyatt and Visa have found that the public’s awareness of health savings accounts is still “quite low” and “confusion runs high”, reports the Times.
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Source: America’s Health Insurance Plans, July 2005

America’s Health Insurance Plans has released a compact guide containing answers to frequently asked questions about health savings accounts (HSAs), health reimbursement arrangements (HRAs), flexible spending arrangements (FSAs), and medical savings accounts (MSAs). For anyone confused about the features of these account-based products, this guide answers questions about eligibility, tax benefits, qualified expenses, portability, and more.
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Authors: Nadeem Esmail and Jason Clemens
Source: The Fraser Institute, July/August 2005

Many Canadians believe that the country’s socialized health care system is the reason that their tax burden is heavier than that of the United States, but recent data from the Organisation for Economic Co-Operation and Development (OECD) shows that government spending on health care is not to blame, write Nadeem Esmail and Jason Clemens of the Vancouver-based Fraser Institute. According to the OECD, Canadian governments collected 40.6% of GDP in revenues in 2004, while the US collected only 31.2%. “If higher taxes in Canada are really the consequence of higher health care spending in this country, then it follows that public (i.e. government) spending on health care must be significantly greater than that in the US,” write the authors. But in 2002, both countries “spent roughly the same amount” on public health care: 6.6% of US GDP, representing $2,364 per person; and 6.7% of Canadian GDP, representing $2,048 per person. “The OECD data clearly contradicts the myth that Canadians pay higher taxes to finance our health care system,” conclude the authors. “You simply cannot explain a 9.4 percentage-point gap in our comparative government burdens by a 0.1 percentage-point difference in public health spending.”
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Author: Douglas Holtz-Eakin
Source: Congressional Budget Office, 07/20/05

The director of the Congressional Budget Office provided a detailed primer on how Medicaid purchases prescription drugs in testimony before the Senate Special Committee on Aging. Douglas Holtz-Eakin described how pharmacies are paid, including dispensing fees and product mark-ups, and the system of rebates paid to Medicaid by pharmaceutical companies in exchange for having their drugs listed. Holtz-Eakin also described CBO’s research comparing Medicaid’s net payments for prescription drugs with those of other purchasers. CBO found that “Medicaid prices are significantly lower on average than the lowest prices paid to manufacturers by private-sector purchasers.” The conclusion: “Medicaid does as well as many other federal purchasers and better than the private sector.”
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National Press Club Luncheon Featuring Mark McClellan, MD, PhD
Thursday, July 28, 2005, 12:30 p.m.

Mark B. McClellan, the administrator of CMS, will speak about the history and future of Medicare and Medicaid at their 40th anniversary. This event is open to everyone, and costs $16 for Press Club members and $28 for their guests; $35 for nonmembers. Advance reservations should be made by telephoning 202-662-7501. For additional information, go to:


Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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