Mises Wire

Free-Market Medicine: The Role of the Large Medical Firm

mayo clinic

There is a common misconception that if healthcare operated under free market conditions, it would primarily be a cottage industry of solo practices and of small physician-owned hospitals. Such operations would not develop the capabilities of large healthcare entities that we commonly associate with central planning.

In reality, however, the opposite would be the case. If healthcare were unregulated, many physicians would ultimately become employees in large organizations because patient demands for better and more specialized care would foster the emergence of large medical firms that would accelerate an effective and innovative division of labor. Economist Per Bylund has elaborated a general theory of the development of the firm along those lines.

In the case of healthcare, the historical record also supports that contention. My favorite example is that of the Mayo Clinic, a product of the free market and a stellar example of an organization that pushed the boundaries of innovation and specialization.

In the Sketch of the History of the Mayo Clinic and the Foundation, we learn that William W. Mayo and his two sons rendered all medical and surgical physician duties until 1892. Thereafter, however, doctors were rapidly added to the staff so that, by 1920, the clinic was offering an astonishing number of specialized services: a dozen or so surgical and medical services, and laboratories which included clinical and surgical pathology, roentgenology, electrocardiography, metabolism, and biophysics! In addition, the Mayo supported a large number of associated professional services, a division of records,1 a division of correspondence, and a division of publication.

Another example is the Cleveland Clinic which was founded on a model emulating the Mayo Clinic. By 1921 it had 14 employed physicians on staff, and would later go on to employ many more. If the healthcare market had been left unhampered, it is likely that many similar institutions would have emerged to serve the public.

Instead, political maneuvering by the American Medical Association in the 1920s and 1930s ensured that hospitals would adopt organizational models that preserved the autonomy of the medical staff and discouraged the employment of physicians. The argument advanced in favor of such arrangements was that a physician’s relationship to patients was unique, and being accountable to a third party constituted “a conflict of interest.”

In effect, the autonomous medical staff model, established by state-level regulations, promoted a peculiar structure where authority and accountability for the care of patients was split. This allowed many physicians to remain self-employed which, in many ways, hampered the development of truly efficient medical firms.

Today, the push for accountable care organizations (ACOs) is sensing the error of the past and turning the argument 180 degrees: we are now told that the employment of doctors no longer constitutes a conflict of interest but, instead, fosters “an alignment of interest” for better utilization of resources.

So the prediction is this: When the current reforms pushing physicians to become employees fail to solve the healthcare crisis, doctors will be blamed for being employees.

We are already seeing signs of this. In a lengthy article on “The Tangled Hospital-Physician Relationship,” Health Affairs describes how the tug-of-war between hospitals and physicians is evolving: Decades ago, doctors had the upper hand. In the era of the ACO, it is hospitals that dominate.

Unfortunately, employed MDs are not fulfilling the promise of the alignment of interests: In addition to increasing payroll expenses for ACOs, physicians contribute to increased utilization of healthcare. How dare they! Since medical licensing laws continue to place doctors at the nexus of all healthcare transactions, the scapegoating is unlikely to abate.

In defense of the employed physician, I would like to make the following points about the ethics of being an employee and its potential for conflicts of interests:

Ethics pertain properly to the behavior of individuals and to the choices they make, not to the position they hold. I have known employed physicians who, day in and day out, demonstrate heroic dedication to patients — far greater than I could show — and who give of themselves far more than they materially receive in exchange. In my opinion, the motivation to excel has little to do with external rewards or financial gain.

Conversely, bad apples are not confined to any particular setting. There is nothing intrinsically unethical or conflicting about being an employed physician. As I have argued many places before, the main systemic dislocation of interests is in the practice of third party payment and its inevitable moral hazards, not in the employment status of physicians.

I must emphasize that even direct pay and free market arrangements do not eliminate potential for conflict. In the free market, for example, physicians are under pressure to please patients. In many instances — but not always — promoting health and pleasing patients are converging goals. At times, however, physicians whose income depends directly on satisfying the patient may be tempted to make unhealthy accommodations in the care they provide.

No matter the setting, then, there are opportunities to shine or fumble. Physicians wanting to practice medicine, then, may have good reasons to seek employment in a large organization.

First of all, no matter how foolish the healthcare system is, and no matter how misguided the current reforms are, there’s a practical argument to join an ACO: that’s where patients are being corralled. If one wishes altruistically to have a busy practice, it seems logical to follow that trend.

Second, physicians have families and personal obligations. In these tumultuous times, it’s perfectly reasonable to bet on what may seem like a more financially secure prospect. In addition, the regulatory burdens of medical practice are enormous, and so are the liability risks of being found “non-compliant” with the rules. It is therefore rational to seek cover under the umbrella of an ACO.

Third, the ACO idea is the logical next step in a series of interventions begun decades ago once society agreed to objectify the doctor-patient relationship. What could a doctor possibly do individually to counter that sociocultural trend? Given our current state of affairs, some degree of cooperation with evil seems inevitable no matter what the practice setting might be.

So I just wanted to lend moral support to my colleagues who can’t avoid the machine and who continue to do their best to help patients and remain faithful to the profession. As we’ve all learned in medical school, illegitimi non carborundum.

  • 1The Mayo Clinic pioneered the development of the modern medical record in the early 1900s. The department of records became legendary for its astounding capabilities and was key to the Clinic’s success in clinical research. What a sad sign of decline to see that the Mayo was compelled last year to adopt the maligned EPIC electronic health record system!
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