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Real Medical Freedom

August 27, 2004

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Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps—Ludwig von Mises, "Middle of the Road Policy Leads to Socialism," April 18, 1950.

We're going to take things away from you on behalf of the common goodHillary Rodham Clinton, June 28, 2004.[1]

My article of June 11 received a tremendous response and letters continue to come in. Mises.org and many other readers passed along and requested a response to an article appearing in Barron's on June 14 dealing with the same topic but from an opposing view. Other than satisfying reader requests, the other reason for what follows is that the Mises Institute stands almost completely alone in its support of true health freedom, but what that entails deserves more coverage and exposition. (In contrast, the Cato Institute has thrown its support to reforms such as "decentralized Medicaid" and vouchers.)[2]  

Health-care coverage and costs have consistently ranked among the top issues of concern to voters and these issues will certainly loom large in a Kerry or second Bush administration. Apologies for the delay (due to a hectic summer schedule), but herein is my response to the Barron's article as well as replies to some common objections by physicians and AMA supporters.[3]

William Weeks, M.D., and Amy Wallace, M.D. ("Weakness in Numbers," Barron's, June 14, 2004) assert that more physicians would drive up health-care costs and worsen care outcomes for patients. It's flattering to see a couple of psychiatrists learning economics, but it's quite obvious that in a system comprised of artificially scarce supplies and prepaid-consumption demand, partial reforms will have little or even deleterious effects. (Many readers misunderstood me as advocating a single reform.)[4]

First a brief history of hospitals and insurance, then a return to Weeks and Wallace.

Free-Market Medicine in the U.S.

Free-market medicine in the U.S. did not begin with the American Revolution. A situation most closely approaching a free market existed in the U.S. between about 1830 and 1910. Between 1830 and mid-century, colonial licensing laws were repealed, temporary, or rarely enforced. By the late 1860s,

The profession was, throughout the country, unlicensed and anyone who had the inclination to set himself up as a physician could do so, the exigencies of the market alone determining who would prove successful in the field and who would not. Medical schools abounded, the great bulk of which were privately owned and operated, and the prospective student could gain admission to even the best of them without great difficulty. With free entry into the profession possible and education in medicine cheap and readily available, large numbers of men entered practice.[5]

Of course wide entry drove incomes down and the forces of organized medicine sought to reverse that development. Well before the Flexner Report of 1910, the American Medical Association (AMA) made preparations to dramatically alter this landscape. In 1894 inroads were made in getting state courts to rule against alternative practitioners, even with informed choice and claimed benefits of treatments by the patient. In 1898 the medical fraternity of New York started campaigning against free vaccinations, citing financial concerns. By 1901, all states except Oklahoma and Alaska had medical licensing boards.

Supply

The Flexner Report of 1910 was a disguised repeat of AMA's 1906 inspection of medical schools. AMA didn't publish its 1906 findings or use them as a basis for closing schools because of the obvious appearance of conflict of interest. The Flexner Report, a proxy undertaken by the Carnegie Foundation, looked like a much more effective route, and it was.[6]  Furthermore, Abraham Flexner was accompanied on his inspection by the AMA's N.P. Colwell who took care to make sure that the new report would mirror AMA's 1906 findings. Finally, Flexner spent a great of deal of time at AMA's Chicago headquarters preparing his report. Cutting to the chase, one ultimate effect of the report was to keep the number of doctors per 100,000 people in the U.S. by 1963—143—at the same level it was at in 1910. In number, medical schools went from a high of 166 around the time of Flexner to just 77 by the 1940s—a 54 percent reduction.[7]

Hospitals were transformed as well, particularly for-profit institutions. In areas where they weren't directly outlawed, they were hindered with a number of regulatory burdens not faced by non-profits, including income and property taxes. Non-profits benefited from generous government subsidies (e.g., the Hill-Burton Act of 1946), tax-deductible charitable contributions, and local planning agencies in their hip pockets which thwarted the expansion of for-profit institutions. This disparate treatment took its toll:  At the time of the Flexner Report, almost 60% of all U.S. hospitals were for-profit institutions. By 1968 only 11% of hospitals were for-profit institutions with about an 8% share of hospital admissions.[8]

Some free-market economists believe that the dominance of non-profit hospitals and medical schools fit much better into organized medicine's agenda than profit-oriented institutions because for-profits (at least the ones of yesteryear) were controlled by owners or shareholders with a single focus:  efficiency in the delivery of services to maximize profits. Non-profit institutions are more free to pursue other goals (political or otherwise), especially those consistent with organized medicine such as the more costly and time-consuming schooling found in non-profit medical schools that effectively serves to limit entrance to the profession and keep incomes elevated. (Notice in Weeks and Wallace's article and an e-mailed objection below the arguments that numbers either are or should be limited because of the high cost of education.)

Demand

Early last century, prepaid health insurance plans were created for the timber and mining industries in Oregon and Washington to deal with the risks to workers inherent in those industries. As free-market, for-profit insurance, claims were closely scrutinized by adjusters. Fees, procedures, and exceptionally long hospital stays were closely monitored and subject to challenge. There was a group of physicians in Oregon who didn't particularly like this scrutiny, so they created their own plan where procedures would be reimbursed and fees paid with few questions asked. Plans of similar structure began to dominate the market in other areas due mainly to government-provided advantages. In 1939 the Oregon plan and similar ones in other states were subsumed under a symbol known as the Blue Shield.

That same year, Blue Cross was endorsed by the American Hospital Association. Blue Cross had already been around for ten years, a creation of businessman Justin Ford Kimball at Baylor University. Blue Cross, in the beginning, was a hospital insurance plan for 1,300 Dallas school teachers that enabled them to pay for up to three weeks of hospital care through small monthly payments.

Singing the Blues

The trouble with the Blues began when they, heavily favored by many hospitals and physicians, declared war on non-Blues plans. Goodman (1980) contends that some physicians lost hospital privileges and even medical licenses for accepting non-Blues plans. The Blues also obtained state government supported advantages not available to non-Blues plans. In many states the Blues paid low or no premium taxes, sometimes no real-estate taxes, no minimum benefit/premium ratios, and low or no required reserves.

(Interestingly AMA, which opposed physicians distinguishing the quality of their services from each other in advertising as unethical, approved of physicians and hospitals posting Blue Cross and Blue Shield advertisements prominently in their waiting rooms.)

Armed with government advantages, the Blues steadily came to dominate the industry. By 1950 Blue Cross held 49 percent of the hospital insurance market while Blue Shield held 52 percent of the market for standard medical insurance.[9]  They merged in 1982 and today (according to their own figures) cover one of every three Americans. Blues practices were a perversion of true insurance in four ways:

  • Hospitals were paid on a cost-plus basis. Insurers were paid not a sum of prices charged to patients for certain services but costs that bore no necessary relationship to prices for services performed.   
  • Insurance of even routine procedures. This spelled the end of true insurance. What replaced it was not actual insurance but prepaid consumption that encouraged overuse of services.
  • Insurance premiums based on "community rating."  The word "community" meant that every person in a specific geographic area regardless of age, habits, occupation, race, or sex was charged the same price. For example, the average 60-year-old incurs four times the medical expense of the average 25-year-old, but under community rating both are charged the same price, which is another way of saying that young people are overcharged and the elderly undercharged.
  • Pay-as-you-go system. Unlike the sound type of hospital insurance which placed premiums in growing reserves to pay claims, "insurance" created by the Blues collected premiums that only covered the expected costs incurred by policy holders over the following year. If a large group of policyholders became ill over the course of several years, the premiums of all policyholders had to be raised to cover the increase in costs.

These four practices were incorporated into the federal Medicare and Medicaid programs when they were created in the mid-1960s. The effect was not only an abolition of true medical insurance but also an abolition of price competition and close cost-containment oversight by third-party payers. Community rating collapsed when young people who were overcharged refused to buy insurance and were not the worse off since they were more healthy. Pure cost plus ended in the mid-1980s with movements toward health-maintenance organizations (HMOs)[10]and self-insurance by large corporations.

Thus the U.S. health care system has entered three rough stages (dates are approximate and refer to open and at least fairly viable attempts at implementation):  Pure Cost Plus (1946–1983), Cost Plus with Some Containment (1983–1991), and Movement Toward National Health Insurance (1992–). The second stage is characterized by implementation of cost containment measures on the demand side and supplier attempts to get around them (e.g., cheaper outpatient surgery at surgical centers driven out by more expensive hospital outpatient centers, unbundling of service packages to increase charges, fudging official diagnoses to secure coverage). Although progressives certainly proposed national health insurance well before 1992, the third stage is characterized by state-level attempts to ban cost containment measures, the serious consideration of implementing "pay-or-play" plans, and byzantine schemes such as the Magaziner-Clinton plan of 1993–94.

To make the rest of this long story short (and get back to Weeks and Wallace), wage and price controls the federal government enacted during World War II prevented large employers from competing for labor based on wage rates, so they competed based on the quality of benefits. The most effective benefit for luring labor to large employers was generous health insurance policies.

The decision by the federal government to allow these large-employer benefits to be obtained tax-free while effectively taxing plans purchased by small businesses and the self-employed created a system where medical insurance became not only perversely tied to the size of a worker's employer, but to employment itself. The price of health insurance for many self-employed workers and small businesses became unaffordable.

The Current Mess

Looking at the mess of the current system, it is clear that increasing physician supply alone is woefully insufficient. Weeks and Wallace (hereafter W&W) mention supply-driven demand. This phenomenon is not naturally inherent in medical markets and isn't even everywhere in the current system. An example is cosmetic services, typically not covered by third-party payers. Unlike hospitals and regular practices, full pricing information is freely available up front (and thus there is some competition on the price front), wait times are short and in nicely decorated rooms. Consumers don't assume a practitioner in this market gets good results merely because he or she is licensed. (Horror stories are in circulation.)

W&W are correct in emphasizing that increasing physician supply alone in the current system could lead to unfavorable effects on costs. Oddly, they make a few proposals (more on those below) including medical-savings accounts (now called health savings accounts) that if they had any real teeth (they of course don't), would mitigate the unfavorable effects they mention. Because these proposals are run-of-the-mill window dressing, combined with additional doctors they would only comprise a partial deregulation. Although this partial deregulation would not be as disastrous as those past in the savings and loan and California utilities industries, they would still be of limited value.

Government favoritism toward the Blues and their perverse reincarnation of true insurance as well as unfavorable treatment of for-profit hospitals and medical schools has to end for lasting cost reduction and stability to be achieved. Once this occurs, the number of new physicians can grow and health costs will fall and remain stable. How to undo a century of regulatory mischief is tricky, as some of the worst regulation was in place at the state level by the 1920s.

Health consumers who are reasonable can agree that the idea that health care is a "right" is absurd. To turn scarce goods and services (some of which did not exist even a few years ago) into rights is a de facto state conscription of caregivers. Equally silly is W&W's notion that incomes should generate a level of return in covering educational expenses at some parity with some members of other occupations.

Humanities Ph.D.s at large state schools (taking an average of 7 years to finish their education to no necessary academic placement) would know better than to think they were entitled to such. Today we have thousands of young men who have (some recently) spent five years earning bachelor degrees in electrical, mechanical, and software engineering who are now waiting tables, bartending, and working construction jobs because of the recent wave of outsourcing. (W&W would also do well to remember that med students are not the only students dealing with increasing educational costs and the burden of student loans.) 

These are extremely painful displacements throwing many lives and aspirations into chaos. Over time the real macro gains will outweigh the costs, but organized medicine's view that it alone should be exempt from adverse structural and cyclical macro changes is arbitrary and won't survive long term anyway, despite a very impressive and so far pretty successful insularity.

Economic constraints, like the force of gravity, always return. The question is, in what form?  Free-market forces which are the source of the highest standard of living on the planet, or government budget constraints?  The latter has not only hurt the quality of care in Canada but, in the end, failed to control costs. Says Canada's Fraser Institute, "Canadian taxpayers are paying for a world-class health care system, while getting service that ranges from mediocre to terrible. Even a decent performance in Canada is an unimpressive performance overall."

W&W seem fearfully preoccupied with the prospect of falling incomes. Of course in a free market, medicine would once again experience the painful displacements that affect all other industries:  some practices would greatly prosper, others would do fine, and still others would fail. Competent specialists, surgeons, and niche caregivers would still do very well, some maybe even better. No one who champions free markets is opposed to anyone earning a high income. The real issue is not income levels per se, but whether income is primarily a function of free productivity or government-enforced artificial scarcity.   

It is sad to read W&W's attempts to scare readers with frightful images of dumb doctors performing "[c]ut-rate neurosurgery" and performing additional procedures to make up for declines in Medicare reimbursement rates. Facing similar sensational arguments for the status quo more than forty years ago, Milton Friedman's response is interesting:

Even when [leaders of medicine] explicitly comment on the desirability of limiting numbers to raise incomes they will always justify the policy on the grounds that if "too" many people are let in, this will lower their incomes so that they will be driven to resort to unethical practices in order to earn a "proper" income. The only way, they argue, in which ethical practices can be maintained is by keeping people at a standard of income which is adequate to the merits and needs of the medical profession. I must confess that this has always seemed to me objectionable on both ethical and factual grounds. It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical. And if it were so, I doubt that the price would have any limit. There seems little correlation between poverty and honesty. One would rather expect the opposite; dishonesty may not always pay but surely it sometimes does.[11]

Weeks and Wallace's reform proposals, while well intentioned, signify little. While they're certainly correct to point to perverse incentives, the history of the system underscores the futility of such Band-Aid proposals. Medical savings accounts, increased co-payments, eliminating Medicare disparities, and insurers only paying for "useful and safe" treatments would be fought and undermined as such reforms have been fought and undermined throughout the history of the system. Perverse incentives exist because the system likes the policies that produce them. In a truly free system, there is no "weakness in numbers," but strength in competition and choice.

Responses to Readers

Some common objections (e-mailed or blogged) to my previous article by physicians and AMA supporters:

The problem you focus on, not enough doctors, is in fact not due to caps the AMA puts on admissions committees or residency programs, it is due to economics.

Medical education is funded primarily by state and federal govenments. The AMA doesn't control how many medical school[s] there are the US. States fund medical school[s] in an effort to lure students to stay and practice medicine. The federal government funds graduate medical education through Medicare (residency) with few exceptions.

Sorry, but you're both flat-out wrong about AMA. First, AMA's activities perverted the system's economics. Second, decisions of state and federal governments are in turn influenced by special interests.[12]  Here are just a few other sources:

Goodman and Musgrave (p. 144): It [AMA] convinced legislators that only graduates of first class (Class A) medical schools ought to be licensed, and they delegated the classification of institutions—explicitly or implicitly—to the AMA. These standards, set either by statute or by state medical examining boards, provided that the boards consider only the graduates of schools approved by the AMA and/or the American Association of Medical Colleges [sic], whose lists were identical.

Goodman and Musgrave mean the Association of American Medical Colleges (AAMC). Of course the lists being identical should be no surprise as AAMC, founded in 1876, is a de facto arm of AMA.

Kessel (p. 29): The delegation by the state legislature to the AMA of the power to regulate the medical industry in the public interest is on a par with giving the American Iron and Steel Institute the power to determine the output of steel. This delegation of power by the states to the AMA, which was actively sought and solicited, placed this organization in a position of having to serve two masters who in part have conflicting interests. On the one hand, the AMA was given the task of providing an adequate supply of properly qualified doctors. On the other, the decision with respect to what is adequate training and an adequate number of doctors affects the pocketbooks of those who do the regulation as well as their closest business and personal associates.

Kissam (p. 15): The AMA's Council on Medical Education has been able to reduce the number of new physicians entering the profession by increasing the standards for accreditation of medical schools, thereby driving some schools out of business, discouraging new schools from opening, and reducing the size of others [yet the] quality standards for physician licensure have never been carefully correlated with definitions of acceptable medical performance. "[I]mprovements" in standards for accredited medical schools generally have been imposed at times when physicians' incomes were relatively depressed and have been accompanied by open expressions of concern by leaders of organized medicine about the "over-crowded" medical profession.

I could cite more, but there's probably not much of a point if some critics insist on asserting, against all evidence, that none of this exists or ever happened. Limited entrance is what drove some students to Caribbean schools. Goodman and Musgrave (p. 155) on Caribbean schools:

Although the quality of training in many of those schools was suspect, they successfully prepared students to pass medical licensing exams administered in the United States. It is ironic, in view of the AMA's emphasis on a high quality of medical education, that 46 percent of all newly licensed physicians in 1972 were graduates of foreign schools! . . . [and] today, more than 130,000 U.S. doctors (including 20,000 U.S. citizens) are graduates of foreign medical schools.

AMA represents less than 30% of doctors. How could they be as powerful as you claim?

Proportions such as you cite can mean little. Only 7 percent of gun owners are members of the National Rifle Association, yet the organization is indisputably powerful. Special interests leverage so much power because they're informed, organized, centralized, homogeneous in membership and interest, and active in seeking well-defined benefits from legislatures. They obtain economic rents at the expense of taxpayers and consumers who are unorganized, uninformed, and paying costs that are not well defined or conspicuous.

I don't understand your claim that AMA is a union. Where have you seen physicians collectively bargain with or strike against hospitals and HMOs?  Tell me.

First of all it's not uniquely my claim. A union is any organization that advances the economic interests of a certain occupational group by increasing wages or bettering working conditions. Of course AMA isn't as explicit a union as say, California supermarket workers and economists such as Friedman who have designated AMA a union aren't saying it is. Clearly the specific process in each case is slightly different but toward similar results:  lowering quantity supplied in order to increase income.

For grocery workers in California and other unskilled labor, collective bargaining raises wages above equilibrium levels and some clerks lose their jobs (market "surplus" or unemployment). With AMA (and as many attorneys who wrote me emphasized) and to a certain extent in law, entry is blocked at its most effective level (not licensure, but training) to restrict market supply. In both cases, there is frustration among and rejection of potential suppliers of labor as a result of an effort to increase incomes. Lack of bargaining is no sufficient condition for ruling out the existence of a union.

We don't need more physicians, we need less malpractice attorneys.

There's no doubt that some malpractice cases are outrageous. Not to defend people such as John Edwards[13]and his ilk, but the narrow focus on plaintiff's attorneys is a bit simplistic. Some doctors are refusing to treat malpractice attorneys, their families, and people who work for them—which they have every right to do—but oddly this ostracism doesn't extend to plaintiffs and members of juries, the very people seeking the cases and giving out hefty awards, respectively. I don't see anything wrong with losers paying legal costs, at least as one measure to stem frivolous suits, but there are other actors involved than just plaintiffs' attorneys.

One contradiction you make that stands out is your argument on unnecessary procedures. You want unbridled admissions so that competitive pressures lower medical expenses. However this would undoubtedly have the unintended consequence of also increasing unnecessary and elective procedures.

There's no contradiction whatsoever. The structure of insurance (which I hardly support) fuels the unnecessary treatments. I never stated that altering one factor on one side of medical markets would be sufficient reform. Also, read the last paragraph of the last article more carefully. I think cash practices that do away with insurance are a good development.  

Further, the AMA's power is being eroded by the growth of physician assistants, nurse practioners and nurse anesthetists.

Sorry, but I don't see the evidence. In some states those categories you name have significant freedoms in practice, in others they do not. A spokesperson for the American Academy of Nurse Practitioners in Washington laughed at the claim when I told her. "I don't see an erosion, there is just so much work to do for everyone in health care right now. I don't see it," she told me.     

It just so happens I am one of the over 25, white, males you identified in your article. I did have challenges getting into an Allopathic medical school so I am instead entering the Arizona College of Osteopathic Medicine in August. Osteopaths have the same licensing and residency requirements as Allopaths and can perform every procedure that an MD can in a clinical setting. D.O. physicians in fact make up over 6% of physicians and over 10% of primary care physicians nation-wide. They are self-governed by an organization analogous to the AMA called the AOA. Where's the monopoly in that?

If you can name for me one other organization besides AMA that limits the number of M.D. programs in the U.S. and the number of new students entering those programs annually and has the power to alter those limits, I would be interested in hearing about it.

AMA did everything in its power last century to shut down osteopathy, asserting that it was quackery. In the 1920s representatives of AMA referred to osteopaths as "cultists" with whom allopaths should not professionally associate. AMA viewed osteopathic education as inferior and barred osteopaths from AMA membership and initially blocked them from hospital privileges and government medical programs.[14]  This gradually changed, but only after osteopathy began to embrace both the drive for licensure and elements of the allopathic paradigm. As Princeton sociologist Starr (1982) points out, alternatives to allopathy (such as osteopathy) quickly lost public acceptance when they blurred the distinction between themselves and allopaths.       

This harmed osteopathy as most Americans today know what an M.D. is, have at least a vague idea of what a chiropractor is, but (as an osteopath I know lamented) largely do not know what a D.O. or osteopath is and that's a terrible shame. The field would have much to offer some patients. I'm well aware of the 6 and 10 percent market shares, but perplexed as to why in the world a prospective osteopath denied entrance to an M.D. program would be vehemently defending AMA. If AMA had fully gotten its way, you wouldn't be practicing medicine at all.

-------

Dale Steinreich is an adjunct scholar of the Mises Institute and contributor to AgainstTheCrowd.com. dsteinreich@msn.com. Comment on the Blog.

References

Friedman, Milton. Capitalism and Freedom. 1982 ed. Chicago:  University of Chicago, 1962.

Goodman, John C. The Regulation of Medical Care:  Is the Price Too High?  Washington:  Cato, 1980.

Goodman, John C. and Gerald L. Musgrave. Patient Power. Washington:  Cato, 1992.

Hamowy, Ronald. "The Early Development of Medical Licensing Laws in the United States, 1875-1900."  Journal of Libertarian Studies. 3, no. 1 (1979):  73–119.

Kessel, Reuben A. "Price Discrimination in Medicine."  Journal of Law and Economics. October 1958, 20–53.

Kissam, Philip. "Physician's Assistant and Nurse Practitioner Law:  A Study of Health Law Reform."  Kansas Law Review 24 (1975):  15.

Starr, Paul. The Social Transformation of American Medicine. Basic Books, 1982.

 


[1] Senator Clinton (D, NY) was referring to tax-rate reductions, but given her ambitions for the U.S. health-care system, this no doubt reflects her attitude toward free choice in medicine as well.

[2] See Goodman and Musgrave, pp. 612–18. Their book was published by Cato and their section on the history of the U.S. health system, among various treatments, is recommended. Unfortunately their reform proposals are mildly free market in orientation. As a help, I will repeatedly cite them in this article to give readers a one-stop place (as much as possible) to verify information. Their book is now selling at Amazon used for only one penny. At that price, it's a good deal.     

[3] Being a libertarian writer is always amusing. Write an article against gun control, and you get angry letters from "libertarians" for gun control. This latest round of course included a few letters from "free-market" physicians chiding me for not seeing how medicine was an "obvious exception" that needed heavy government controls because "everyone knows" that free markets in health-care naturally do not work. They of course did work before governments got heavily involved.    

[4] The article was merely marking the 100th anniversary of CME, it was not a broad manifesto for health reform.

[5] Hamowy, p. 73.

[6] Said AMA's CME head Arthur Bevan in a 1928 article in JAMA, "If we could obtain the publication and approval of our work by the Carnegie Foundation for the Advancement of Teaching, it would assist materially in securing the results we are attempting to bring about."

[7] For these facts and more see Goodman and Musgrave pp. 137-61. Hamowy (1979) is also recommended. Fifty-four percent was in line with AMA's 1906 goal.

[8] See Goodman and Musgrave p. 156 for a graph and a list of primary sources.

[9] Goodman and Musgrave, p. 160.

[10] Of course HMOs go back in time way before the 1980s. Some historians trace them back to the late 1920s.

[11] Friedman, p. 152.

[12] As an analogy, one could argue that the National Rifle Association (NRA) has no effect on the availability of firearms in the U.S., and that federal and state governments affect firearms availability instead. Again, it's an incomplete etiology. If a person asserting such were applying for a staff position at the anti-gun Violence Policy Center or Brady Campaign, my uncourageous guess is that they wouldn't be taken very seriously or be hired.

[13] Yes, he was involved in malpractice cases and won some substantial sums of money on the basis of the idea that C-sections could prevent cerebral palsy.

[14] See Wolinsky and Brune, p. 123–4. Reference citation at end of previous article.


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