The first building blocks of the cost-plus system were put into place by the political activities of physicians more than 100 years ago. Those activities, coordinated through the American Medical Association (AMA) and county medical societies, are called the actions of organized medicine, to distinguish them from the uncoordinated actions of individual physicians competing against one another in the marketplace. By the 1950s, organized medicine had achieved virtually all of its political goals: the creation of nonprofit institutions designed to control entry into the medical profession and to suppress competition for physicians’ services; the creation of a nonprofit hospital sector, chiefly responsive to physicians; and the creation of a nonprofit health insurance sector that paid most medical bills with little scrutiny and few questions asked. That was Stage I in the evolution of the cost-plus system, and it survived for at least three decades.
During the 1980s, however, we entered Stage II, the cost-control stage. Physicians now are encountering harassment from third-party institutions and are increasingly torn between their obligations to patients and the demands of third-party payers. The irony is that the problems of today’s physicians are attributable in part to the political actions of their counterparts more than a century ago. Today’s health care system frustrates many people, who often search for someone or some group to blame. Physicians are all too often their targets. Throughout the past 150 years, though, most physicians have not been involved in politics. To the extent that they have had political preferences, most have favored free enterprise. The vast majority have been far more altruistic than the practitioners of other professions.
The historical facts recounted in this chapter will surprise most physicians as much as they surprise others. Those facts include the ways in which doctors’ representatives pursued legislative goals and changed the institutional environment in which medicine is practiced. In doing so, the representatives of physicians had the same motives and many of the same objectives as the representatives of other professions and trades. If there is a difference, it is only that special-interest politics proved more successful in medicine than in other fields. Today’s doctors are not responsible for the political activities of doctors in the past. Indeed, physicians today are among the most tragic victims of cost-plus medicine. If they could, the majority would surely undo the harm done through the medical politics of the past.
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.
This experiment in free-market medical care was short-lived, however. The AMA was established in 1847 and quickly became the spokesman for the practitioners of orthodox medicine in the United States. Although the AMA often stressed the importance of raising the quality of care for patients and protecting uninformed consumers from "quacks" and "charlatans," its principal goal - like that of other trade associations - was to advance the financial well-being of its members. It pursued its objective by promoting the establishment of state medical licensing laws and the legal requirement that, to be licensed to practice, a physician must be a graduate of an AMA-approved medical school. Clearly, it sought to raise the incomes of existing practitioners. A report submitted by the committee on educational standards to the first AMA convention in 1847 was unusually candid:
The very large number of physicians in the United States ... has frequently been the subject of remark. To relieve the diseases of something more than twenty millions of people, we have an army of doctors amounting by a recent computation to forty thousand, which allows one to about every five hundred inhabitants. And if we add to the 40,000 the long list of irregular practitioners who swarm like locusts in every part of the country, the proportion of patients will be still further reduced. No wonder, then, that the profession of medicine has measurably ceased to occupy the elevated position which once it did; no wonder that the merest pittance in the way of remuneration is scantily doled out even to the most industrious in our ranks - and no wonder that the intention, at one time correct and honest, will occasionally succumb to the cravings of hard necessity.
It is ironic that most unorthodox ("irregular") practitioners at the time probably did more good—or less harm "to their patients than did the orthodox ones. A second irony is that the committee recommended standards so high that few of the convention’s delegates could have met them. Indeed, one historian has concluded that “rigid enforcement of the AMA’s preliminary standards would have closed down practically every medical school in the country and would have depleted the ranks of formally educated physicians in a few years."
At the first meeting of the AMA in 1847, the delegates not only endorsed collective fee-setting but unanimously endorsed a code that made adherence to established fee schedules a matter of medical ethics. Chapter II, article 7, section 1, of the organization’s original Code of Medical Ethics, read as follows: "Some general rules should be adopted by the faculty, in every town or district, relative to the pecuniary acknowledgments from their patients; and it should be deemed a point of honor to adhere to this rule with as much steadiness as varying circumstances will permit." In other words, the AMA endorsed the ideal of a medical cartel and made participation in it ethically mandatory. Over time, the AMA expanded the range of activities considered "unethical" to include (1) "solicitation of patients, either directly or indirectly," (2) " competition and underbidding," (3) "compensation ... inadequate to secure good medical service," (4) "interference with reasonable competition in a community," and (5) "impairment of ‘free choice’ of physicians."
AMA goals were also promoted by threats of license revocation. The most common causes for revocation, "dishonorable" or "unprofessional" conduct, were mainly euphemisms for what the AMA considered unfair competition. Of the 42 states that had revocation provisions in their medical practice acts in 1907, "incompetence" was grounds for revocation in only two of them.
In 1888, the Journal of the American Medical Association editorialized that "Wholesome competition is the life of trade; unrestricted competition may be the death of it." In 1898, the New York state medical fraternity proposed to prevent free vaccination and the administration of free diphtheria antitoxin on the grounds that it was "inimic to the best [financial] welfare of young medical men." The AMA’s code of medical ethics condemned the practice of giving free care to affluent patients without compensation as "dishonorable" and “unprofessional” because it tended to injure other physicians financially.
In addition, organized medicine vigorously sought to eliminate competition from any unlicensed person who would treat the sick for compensation, regardless of the form of treatment and its effect on the patient. In most states, physicians were successful in broadening the definition of medical practice to include drugless and spiritual healers (for example, Christian Scientists, osteopaths, and chiropractors). At the urging of organized medicine, courts ruled that it was not a defense that patients knowingly accepted the mode of treatment offered, nor that patients may have benefited from the treatment.
In one case, the Nebraska Supreme Court ruled in 1894 that a Christian Science practitioner had violated the state’s medical practice act by accepting compensation in return for treating solely by prayer those who called on him.
A similar decision was reached by the Ohio Supreme Court in 1905. In that case, the court ruled that Christian Science treatment in return for a fee constituted the practice of medicine, even though the cure was to come from God and not from the defendant.
By 1901, all states and territories except Alaska and Oklahoma had medical examining boards. Of the 51 jurisdictions, 30 required candidates for a license to undergo an examination and to present a diploma in medicine; seven required either an examination or a diploma; and two made the M.D. degree a prerequisite for the practice of medicine. Although the number of physicians continued to increase, the number per 100,000 people fell from 163 in 1880 to 157 by the turn of the century.
Nonetheless, in 1901 the Journal of the American Medical Association continued to complain about overcrowded conditions in the medical professions. Hamowy explains why: Licensing laws mandating an examination were clearly not sufficiently restrictive to severely limit the numbers of new physicians entering the profession, even when these laws also required a diploma in medicine. The answer was to lie in statutes which both required a diploma and, in addition, empowered the state examining boards to exclude graduates of "sub-standard" colleges from consideration for licensure.
Ultimately, the Flexner report led to the large-scale closing of medical schools that failed to meet AMA standards. By exercising its power to certify, the AMA caused an almost continuous reduction in the number of medical schools in the United States over the next four decades. [See Figure I.] As a consequence, the number of medical students dropped dramatically. As Figure II shows, following the release of the Flexner report the ratio of doctors to population fell steadily for two decades. To see how effective the AMA’s policies were, consider that doctors in 1963 had far more to offer patients than at the turn of the century and were in far greater demand. But the number of doctors per 100,000 people in 1963 "146 " was precisely what it had been in the year that Flexner had written his report.
The impact of the Flexner report may be unique in U.S. regulatory history. Kessel explains why:
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 ing as well as their closest business and personal associates. It is this power that has been given to the AMA that is the cornerstone of the monopoly power that has been imputed by economists to organized medicine.
Because the decisionmakers on medical school admissions boards could not, or would not, discriminate on the basis of price, they discriminated on other grounds. As Lee Benham has explained, "It should not surprise us that the successful members of the subsequent queue looked remarkably similar to those making the admissions decisions." No doubt many of those decisionmakers reflected the views of Flexner himself. Flexner wrote that "a well-taught negro sanitarian will be immensely useful; an essentially untrained negro wearing an M.D. degree is dangerous" and "the practice of the negro doctor will be limited to his own race."
Other effects of the Flexner report were that medical education became increasingly lengthy and costly, and its subject matter became increasingly unrelated to the conditions of medical practice. The fact that only nonprofit medical schools could become "approved" probably contributed to the nonmarket-oriented attitude of many medical schools and their willingness to cooperate with the goals of organized medicine. Several writers have observed that the AMA’s changing positions on the proper standards for medical education correlated far more closely with the financial pressures faced by practicing physicians than with any clearly defined goals of medical training. For example, Philip Kissam has written that:
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 imposed for physician licensure have never been carefully correlated with definitions of acceptable medical performance. Most significantly, major "improvements" 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.
Traditionally, a medical license was an unlimited license to perform medical services. A physician, once licensed, could theoretically perform any kind of surgery "including open-heart and brain surgery" without any special training as a surgeon. Further, most state licensing laws granted a lifetime tenure to the licensee. Although most states required periodic license renewal, renewal was generally a clerical procedure requiring little more than the signature of the physician and the payment of a nominal fee. Until recently, few states required physicians to show evidence of having updated their knowledge as a condition for maintaining a license.
Not only were physicians not required to keep abreast of the state of medical science in their specialty but, in some states, a physician could continue to practice even if mentally ill. A 1967 survey found that only one state, Arizona, required that a candidate for a medical license be "physically and mentally able safely to engage in the practice of medicine." Some statutes did establish mental illness or mental incompetence as grounds for suspension or revocation of a license, if the extent of the illness rendered the physician "unsafe or unreliable as a practitioner." But other states provided for license revocation or suspension only if the physician entered a mental hospital.
In the 15 states that listed malpractice among the specific grounds for licensing discipline, the standard was usually "gross malpractice," "gross neglect," "gross carelessness," or "gross incompetence." The practical effect of these provisions, as one study concluded, was that the "disciplinary criteria are ... analogous to less stringent criminal standards of gross malpractice, which are usually included in state penal statutes." It would appear that Kessel’s 1970 observation that “once a doctor wins a license to practice, it is almost never revoked unless he is convicted of law-breaking” was not an exaggeration.
But standing between the patients and safely administered, lower cost medical treatment were numerous state laws. A 1975 survey found that, for the country as a whole, many "or perhaps most" routine medical procedures could be carried out only by licensed physicians. Moreover, in those states that allowed delegation of medical acts, the nonphysicians usually had licensing laws of their own and lobbied to keep other qualified nonphysicians from legally performing those same acts. Although many states liberalized their medical practice statutes during the 1970s, many of their unjustifiable restrictions exist even today.
Organized medicine used its state-created powers to punish deviant advertising behavior on numerous occasions. Here are some examples from the 1970s: In Minnesota, a gynecologist was warned against making radio and newspaper announcements of his one-week drive to encourage women to obtain pap smears by offering discount prices; in Santa Clara, California, the county medical society prohibited clinic doctors who specialized in preventive industrial medicine from seeking new corporate clients; and in St. Louis, the local medical association forced the director of Washington University’s sterilization and pregnancy termination clinic to apologize for mailing a brochure describing the center’s facilities, even though the brochure was mailed to local physicians.
The attitude of the AMA toward advertising and price competition was paralleled by that of the associations of related health practitioners. The code of ethics of the American Dental Association, for example, stated:
Virtually all of the restrictive practices described above either have been declared illegal by the federal courts or are almost certainly destined to become illegal. Yet the attitudes shaped and molded by the restrictive practices remain pervasive.
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