Price Discrimination in Medicine*
Reuben Kessel
Journal of Law and Economics
Vol. 1 (1958)
pp. 20-53

Many distinguished economists have argued that the medical profession constitutes a monopoly, and some have produced evidence of the size of the monopoly gains that accrue to the members of this profession.1 Price discrimination by doctors, i.e., scaling fees to the income of patients, has been explained as the behavior of a discriminating monopolist.2 Indeed this has become the standard textbook example of discriminating monopoly.3 However this explanation of price discrimination has been incomplete. Economists who have subscribed to this hypothesis have never indicated why competition among doctors failed to establish uniform prices for identical services. For any individual doctor, given the existing pattern of price discrimination, income from professional services would be maximized if rates were lowered for affluent patients and increased for poor patients. However, if many doctors engaged in such price policies, a pattern of prices for medical services would be established that would be independent of the incomes of patients. Yet despite this inconsistency between private interests and the existing pattern or structure of prices based on income differences, this price structure has survived. Is this a contradiction of the law of markets? Why is it possible to observe in a single market the same service sold at different prices?

The primary objective of this paper, which is an essay in positive economics

* The author is indebted to A. A. Alchian, W. Meckling, A. Enthoven, and W. Taylor of the RAND Corporation, W. Gorter, A. Nicols, and J. F. Weston of UCLA, H. G. Lewis and A. Rees of the University of Chicago, and Gary Becker of Columbia University for assistance

1 M. Friedman and S. Kuznets, Income from independent Professional Practice (1945) ; M. Friedman in Impact of the Trade Union, p. 211, edited by D. M. Wright (1951) ; Also K. E. Boulding, Conference on the Utilization of Scientific and Professional Manpower, p. 23 (1944).

The results of the Friedman-Kuznets study, at p. 133, using pre-war data, indicate that the costs of producing doctors are seventeen per cent greater than the costs of producing dentists, while the average income of doctors is thirty-two per cent greater.

2 J. Robinson, Economics of Imperfect Competition, p. 180 (1933). For example, the world famed Mayo Clinic discriminates in pricing. Albert Deutsch, The Mayo Clinic, 22 Consumer Reports 37, 40 (Jan. 1957). A finance department makes inquiries into the patient's economic status and scales the bills accordingly. Fees are not discussed in advance.

E. A. G. Robinson, Monopoly, p. 77 (1941) ; C. E. Daugherty and M. Daugherty, Principles of Political Economy, p. 591 (1950) ; T. Scitovsky, Welfare and Competition, p. 408 (1941) ; K. E. Boulding, Economic Analysis, p. 662 (1955) ; S. Enke, Intermediate Economic Theory, p. 42 (1950); G. Stigler, The Theory of Price, [/219 (1952).

is to show by empirical evidence that the standard textbook rationalization of what appears to be a contradiction of the law of markets is correct. It will be argued that the discriminating monopoly model is valid for understanding the pricing of medical services, and that each individual buyer of medical services that are produced jointly with hospital care constitutes a unique, separable market. In the process of presenting evidence supporting this thesis, other closely related phenomena will be considered. These are (1), why the AMA favors medical insurance prepayment plans that provide money to be used to buy medical services, but bitterly opposes comparable plans that provide instead of money, the service itself and (2), why the AMA has opposed free medical care by the Veterans Administration for veterans despite the enormous increase in the quantity of medical services demanded that would result from the reduction to zero of the private costs of medical care for such a large group.

The second half of this paper represents an attempt, by means of an application of the discriminating monopoly model, to further our understanding of many unique characteristics of the medical profession. If the medical profession constitutes a discriminating monopoly, what inferences can be drawn concerning the relationship between this monopoly and other economic, sociological and political aspects of the medical profession? In particular, does the discriminating monoply model shed any light upon, (1) why a higher percentage of doctors belong to professional organizations than is true of other professions, (2) why doctors treat one another and their families free of charge, (3) why doctors, compared with any other professional group, are extremely reluctant to criticize one another before the public, (4) why specialists are over-represented among the hierarchy of organized medicine, (5) why a transfer of membership in good standing from one county society to a second sometimes requires serving a term as a probationary member, (6) why advertising that redounds to the interest of the medical profession as a whole is approved whereas advertising that is designed to benefit particular individuals or groups is strongly opposed, (7) why malpractice insurance is less expensive for members of organized medicine than it is for non-members, and finally (8) why minority groups, particularly Jews, have been discriminated against in admission to medical schools.4

The body of this paper is divided into five sections. These are, in order of presentation, a hypothesis alternative to the price discrimination hypothesis, a history of the development of the powers that enable organized medicine to organize effectively a discriminating monopoly, evidence supporting the validity of the discriminating monopoly model for understanding the pricing of medical services, and lastly an application of the discriminating monopoly model to rationalize many characteristics of the medical profession that have been hitherto thought of as either anomalies or behavior that could best be explained as non-economic phenemona.

It is worth noting that there is no inconsistency between the validity of the explanation to be presented and the inability of any or all members of the medical profession, past, present or future, to understand the economic arguments that follow. All that is required of doctors is the ability to engage in adaptive behavior of a very rudimentary character. Consult A. A. Alchian, "Uncertainty, Evolution, and Economic Theory," 58 J. Pol. Econ. 211 (1950).


The standard position of the medical profession on price discrimination is in conflict with what might be regarded as the standard position of the economics profession. Economists argue that price discrimination by doctors represents the profit maximizing behavior of a discriminating monopolist; the medical profession takes the contrary position that price discrimination exists because doctors represent a collection agency for medical charities.5 The income of these charities is derived from a loading charge imposed upon well-to-do patients. This income is used to finance the costs of hiring doctors to provide medical care for the poor who are cirl:. The doctor who is hired by the medical charity and the medical charity itself are typically the same person. Since the loading charge that is imposed upon non-charity patients to support the activities of medical charities is proportional to income or wealth, discriminatory prices result. The following quotation from an unnamed but highly respected surgeon presents the position of the medical profession.

I don't feel that I am robbing the rich because I charge them more when I know they can well afford it, the sliding scale is just as democratic as the income tax. I operated today upon two people for the same surgical condition—one a widow whom I charged $50, the other a banker whom I charged $250. I let the widow set her own fee. I charged the banker an amount which he probably carries around in his wallet to entertain his business friends.6

It is relevant to inquire, why have we had the development of charities operated by a substantial fraction of the non-salaried practitioners of a profession in medicine alone? Why hasn't a parallel development occurred for

However, there is not a unanimity of views either among economists or medical men. Means, a retired professor of clinical medicine at Harvard and a former president of the American College of Surgeons, takes the point of view of the economists. He describes this price policy as charging what the traffic will bear. J. H. Means, Doctors, People and Government, p. 66 (1953).

Seham, "Who Pays the Doctor?", 135 New Republic 10, 11 (July 9, 1956). Those who favor price discrimination for this reason ought to be in favor of a single price plan with a system of subsidies and taxes. Such a scheme, in principle, could improve the welfare of both the poor and the well-to-do relative to what it was under price discrimination.

The equity of a tax that is imposed upon the sick who are well-to-do as contrasted with a tax upon the well-to-do generally has not troubled the proponents of this method of taxation. 5

such closely related services as nursing and dental care? Why is it possible to observe discrimination by the Mayo Clinic but not the A and P? Clearly food is as much of a "necessity" as medical care. The intellectual foundation for the existence of price discrimination and the operation of medical charities by doctors appears to rest upon the postulate that medicine is in some sense unlike any other commodity or service. More specifically, the state is willing to provide food, clothing, and shelter for the indigent but not medical care.` Since medical care is so important, doctors do not refuse to accept patients if they are unable to pay. As a consequence, discrimination in pricing medical services is almost inevitable if doctors themselves are not to finance the costs of operating medical charities.

The foregoing argument in defense of price discrimination in medicine implies that a competitive market for the sale of medical services is inconsistent with the provision of free services to the indigent. This implication is not supported by what can be observed elsewhere in our economy. Clearly there exist a number of competitive markets in which individual practitioners provide free goods or services and price discrimination is absent. Merchants, in their capacity of merchants, give resources to charities yet do not discriminate in pricing their services. Similarly many businesses give huge sums for educational purposes. Charity is consistent with non-discriminatory pricing because the costs of charity can be and are paid for out of the receipts of the donors without recourse to price discrimination.

However the fact that non-discriminatory pricing is consistent with charity work by doctors doesn't imply that discriminatory pricing of medical services is inconsistent with the charity hypothesis. Clearly what can be clone without discrimination can, a fortiori, be done with discrimination. Therefore, it is pertinent to ask, is there any evidence that bears directly on the validity of the charity interpretation of price discrimination? The maximizing hypothesis of economics implies that differences in fees can be explained by differences in demand. The charity hypothesis propounded by the medical profession implies that differences in fees result from income differences. The pricing of medical sereices to those who have medical insurance provides that what might be regarded as a crucial experiment for discriminating between these hypotheses. Whether or not one has medical insurance affects the demand for medical service but does not affect personal income. Consequently if the charity hypothesis

7H. Cabot contends that the community is unwilling to provide for the medical care of the indigent. Therefore the system of a sliding scale of fees has evolved; pp. 123, 266 ff. He estimates that the more opulent members of the community pay ". . . from five to thirty times the average fee" p. 270, The Doctors Bill (1935).

Robinson has defended discriminatory pricing of medical services in sparsely populated areas by using an argument based on indivisibilities. "A Fundamental Objection to Laissez-Faire," 45 Economic Journal 580 (1935). For a refutation of this position, see Hutt, "Discriminating Monopoly and the Consumer", 46 Economic Journal 61, 74 (1936). 6

is correct, then there should be no difference in fees, for specified services, for those who do and those who do not have medical insurance. On the other hand, if the maximizing hypothesis of economics is correct, then fees for those who have medical insurance ought to be higher than for those who do not have such insurance. Existing evidence indicates that if income and wealth differences are held constant, people who have medical insurance pay more for the same service than people who do not have such insurance. Union leaders have found that the fees charged have risen as a result of the acquisition of medical insurance by their members; fees, particularly for surgery, are higher than they would otherwise be if the union member were not insured.' Members of the insurance industry have found that ". . . the greater the benefit provided the higher the surgical bill. ..."9 This suggests that the principle used for the determinations of fees is, as Means pointed out, what the traffic will bear. Obviously fees determined by this principle will be highly correlated with income, although income will have no independent predictive content for fees if the correlation between income and what the traffic will bear is abstracted.l0

Other departures from the implications of the hypothesis that price discrimination results from the desires of the medical profession to finance the costs of medical care for the indigent exist. These are: (1) Doctors typically do not charge each other for medical care when clearly inter-physician fees ought to be relatively high since doctors have relatively high incomes. (2) The volume of free medical care, particularly in surgery, has declined as a result of the rise in real per capita income in this country in the last twenty years. Yet there has been no change in the extent of price discrimination. As real per capita income rises, price discrimination ought to fade away. There is no evidence that this has been the case." (3) There exists no machinery for matching the receipts and disbursements of medical charities operated by

8 E. A. Schuler, R. J. Mowitz, and A. J. Mayer, Medical Public Relations (1952), report the attitude of lay leaders of the community towards the medical profession. For the attitudes of union leaders and why they have these attitudes, see p. 97 ff.

Lorber in Hearings Before the House Committee on Interstate and Foreign Commerce on Health Inquiry, 83d Cong. 2d Sess. pt. 7, p. 1954 (1954) ; Also Joanis, Hospital and Medical Costs, Proceedings of the Fourth Annual Group Meeting of the Health and Accident Underwriters Conference, p. 18 (Feb. 1920, 1952).

10 The principle of what the traffic will bear and the indemnity principle of insurance are fundamentally incompatible and in principle make medical care uninsurable. This has been a real problem for the insurance industry and in part accounts for the relative absence from the market of major medical insurance plans. See the unpublished doctoral dissertation of A. Yousri, Prepayment of Medical and Surgical Care in Wisconsin, p. 438, University of Wisconsin Library (1956).

11 Berger, "Are Surgical Fees Too High?", 32 Medical Economics 97, 100 ff. (June 1955).

individual doctors. There are no audits of the receipts and the expenditures of medical charities and well-to-do patients are not informed of the magnitude of the loading charges imposed. Moreover one study of medical care and the family budget reported ". . . no relation in the case of the individual doctor between the free services actually rendered and this recoupment, the whole system is haphazard any way you look at it." 12


A necessary condition for maintaining a structure of prices that is inconsistent with the maximization by doctors of individual income is the availability and willingness to use powerful sanctions against potential price cutters. When one examines the problems that have been encountered in maintaining prices that are against the interests of individual members of a cartel composed of less than fifteen members, one cannot help being impressed with the magnitude of the problem confronting a monopoly composed of hundreds of thousands of independent producers. Yet despite the fact that medicine constitutes an industry with an extraordinarily large number of producers, the structure of prices for a large number of medical services nevertheless reflects the existence of discrimination based on income. This implies that very strong sanctions must be available to those empowered to enforce price discipline. Indeed, a priori reasoning suggests that these sanctions must be of an order of magnitude more powerful than anything we have hitherto encountered in industrial cartels. What are the nature of these sanctions? How are they employed? In order to appreciate fully the magnitude of the coercive measures available to organized medicine, it is relevant to examine the history of medicine to understand how these sanctions were acquired.

Medicine, like the profession of economics today, was until the founding of the AMA a relatively competitive industry. With very few exceptions, anyone who wanted to practice was free to hang out a shingle and declare himself available. Medical schools were easy to start, easy to get into, and provided, as might be expected in a free market, a varied menu of medical training that covered the complete quality spectrum. Many medical schools of this time were organized as profit making institutions and had stock outstanding. Some schools were owned by the faculty.

In 1847, the American Medical Association (AMA) was founded and this organization immediately committed itself to two propositions that were to lead to sharp restrictions upon the freedom of would-be doctors to enter the medical profession and the freedom of patients to choose doctors whom the AMA felt were not adequately qualified to practice medicine. These propositions were (1) that medical students should have acquired a "suitable preliminary education" and (2) that a "uniform elevated standard of requirements for the

12 Deardorff and Clark, op. cit. supra note 9, pt. 6, p. 1646. 8

degree of M.D. should be adopted by all medical schools in the United States.13

These objectives were achieved in two stages. During the first stage, the primary concern of the AMA was licensure. In the second, it was accrediting schools of medicine. During the first stage, which began with the founding of the AMA and lasted until the turn of the century, organized medicine was able by lobbying before state legislatures to persuade legislators to license the practice of medicine. Consequently the various states set up boards of medical examiners to administer examinations to determine whether or not applicants were qualified to practice medicine and to grant licenses to those the State Board deemed qualified to practice. Generally speaking, organized medicine was very successful in its campaign to induce states to license physicians. However, the position of organized medicine was by no means unopposed. William James, in testimony offered before the State House in Boston in 1198 when legislation concerned with licensing of non-medically trained therapists was being considered, adopted a nineteenth century liberal position. To quote from this testimony:

One would suppose that any set of sane persons interested in the growth of medical truth would rejoice if other persons were found willing to push out their experience in the mental healing direction, and to provide a mass of material out of which the conditions and limits of such therapeutic methods may at last become clear. One would suppose that our orthodox medical brethren might so rejoice; but instead of rejoicing they adopt the fiercely partisan attitude of a powerful trade union, they demand legislation against the competition of the "scabs." . . . The mind curers and their public return the scorn of the regular profession with an equal scorn, and will never come up for the examination. Their movement is a religious or quasi-religious movement; personality is one condition of success there, and impressions and intuitions seem to accomplish more than chemical, anatomical or physiological information.... Pray, do not fail, Mr. Chairman, to catch my point. You are not to ask yourselves whether these mind-curers do really achieve the successes that are claimed. It is enough for you as legislators to ascertain that a large number of our citizens, persons whose number seems daily to increase, are convinced that they do achieve them, are persuaded that a valuable new department of medical experience is by them opening up. Here is a purely medical question, regarding which our General Court, not being a well-spring and source of medical virtue, not having any private test of therapeutic truth, must remain strictly neutral under penalty of making the confusion worse. . . . Above all things, Mr. Chairman, let us not be infected with the Gallic spirit of regulation and regimentation for their own abstract sakes. Let us not grow hysterical about law-making. Let us not fall in love with enactments and penalties because they are so logical and sound so pretty, and look so nice on paper.14

13 A. Flexner, Medical Education in the U.S. and Canada, Bull. No. 4, Carnegie Foundation for the Advancement of Teaching, p. 10 (1910).

14 2 Letters of W. James, 66—72 (edited H. James, 1920). Dollard reports that James took this position at the risk of being drummed out of the ranks of medicine. Dollard, Monopoly and Medicine


However, it was not until the second stage that economically effective power over entry was acquired by organized medicine. This stage began with the founding in 1904 of the Council on Medical Education of the AMA. This group dedicated itself to the task of improving the quality of medical education offered by the medical schools of the day. In 1906, this committee undertook an inspection of the 160 medical schools then in existence and fully approved of the training in only S2 schools. Thirty-two were deemed to be completely unacceptable. As might be expected, considerable resentment developed in the medical colleges and elsewhere as a result of this inspection. Consequently the council withheld publication of its findings, although the various colleges were informed of their grades.15 In order to gain wider acceptance of the results of this study, the Council solicited the aid of the Carnegie Foundation. "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 were attempting to bring about."16 Subsequently Abraham Flexner, representing the Carnegie Foundation, with the aid of N. P. Colwell, secretary of the Council on Medical Education, repeated the AMA's inspection and grading of medical schools. In 1910, the results of the labors of Flexner and Colwell were published.17 This report, known as the Flexner report, recommended that a substantial fraction of the existing medical schools be closed, standards be raised in the remainder, and admissions sharply curtailed. Flexner forcefully argued that the country was suffering from an overproduction of doctors and that it was in the public interest to have fewer doctors who were better trained. In effect, Flexner argued that the public should be protected against the consequences of buying medical services from inadequately trained doctors by legislating poor medical schools out of business.18

speech delivered at Medical Center, UCLA, to be published by the University of California Presss as one 01 a series of papers presented in celebration of Robert Gordon Sproul's 25th anniversary as President of the University of California. The significance of consumers' sovereignty has been recognized by at least one other maverick doctor. Means, op. cit. supra note 5, at p. 72.

15 Johnson in Fishbein, A History of the _American Medical Association, p. 887 ff. (1947).

16 Bevan, "Cooperation in Medical Education and Medical Service", 90 Journal of the American Medical Association, 1175 (1928)

17 Flexner, op. cit. supra note 13.

Flexner, op. cit. supra note 1.3, at p. 14. Two errors in economic reasoning are crucial in helping Flexner establish his conclusions. One is an erroneous interpretation of Gresham's Law. This law is used to justify legislation to keep low quality doctors out of the medical care market by interpreting it to mean that . , second-class doctors .. will drive first-class doctors out of business. The other is that raising the standards of medical education is necessarily in the public interest. Flexner fails to recognize that raising standards implies higher costs of medical care. This argument is on a par with arguing that we should keep all cars of a quality below Cadillacs, Chryslers, and Lincolns off the automobile market.


If impact on public policy is the criterion of importance, the Flexner report must be regarded as one of the most important reports ever written. It convinced legislators that only the graduates of first class medical schools ought to be permitted to practice medicine and led to the delegation to the AMA of the task of determining what was and what was not a first class medical school. As a result, standards of acceptability for winning a license to practice medicine were set by statute or by formal rule or informal policy of state medical examining boards, and these statutes or rules provided that boards consider only graduates of schools approved by the AMA and/or the American Association of Medical Colleges whose lists are identical.19

The Flexner report ushered in an era, which lasted until 1944, during which a large number of medical schools were shut down. With its new found power, the AMA vigorously attacked the problem of certification of medical schools. By exercising its power to certify, the AMA reduced the number of medical schools in the United States from 162 in 1906 to 85 in 1920, 76 in 1930 and 69 in 1944.20 As a result of the regulation of medical schools, the number of medical students in school in the United States today is 28,500, merely 5,200 more than in 1910 when Flexner published his report.21

The AMA, by means of its power to certify what is and what is not a class A medical school, has substantial control over both the number of medical schools in the United States and the rate of production of doctors.22 While the control by the AMA over such first class schools as, say, Johns Hopkins

19 Hyde and Wolff,

The American Medical Association: Power, Purpose, and Politics in Organized Medicine, 63 Yale L. J. 969 (1954).

20 These figures are from R. M. Allen, Medical Education and the Changing Order, p. 16 (1946). Allen imputes this decline in the number of medical schools to a previous error in estimating the demand for doctors. The decline in the number of schools in existence represented an adjustment to more correctly perceived demand conditions for medical care.

21 Dollard, op. cit. supra note 14. This result was far from unanticipated. Bevan, the head of the AMA's Council on Medical Education, clearly anticipated a decline in both medical students and schools. "In this rapid elevation of the standard of medical education with the increase in preliminary requirements and greater length of course, and with the reduction of the number of medical schools from 160 to 80, there occurred a marked reduction in the number of medical students and medical graduates. We had anticipated this and felt that this was a desirable thing. We had an over-supply of poor mediocre practitioners." Bevan, op. cit. note 16, at p. 1176. Friedman and Kuznets state, "Initially, this decline in the num- ber of physicians relative to total population was an unplanned by-product of the intensive drive for higher standards of medical education." Op. cit. supra note 4 at pp. 10-11. It may have been a by-product, and there are some grounds for doubts on this count, but it surely was not unanticipated.

22 Dr. Spahr contends that there is a ". . . widespread but erroneous belief that the AMA governs the profession directly and determines who may practice medicine. "Medicine's Neglected Control Lever", 40 Yale Rev. 25 (1950). She correctly contends that this power belongs to the state but fails to recognize that it has been delegated to the AMA by the state. Mayer on the other hand recognizes both the power in the hands of the AMA and its source. He argues that the AMA has life and death powers over both medical schools and hospitals, 140 Harpers 27 (Dec. 1939).


is relatively weak because it would be ludicrous not to classify this institution a a class A school, nevertheless control over the aggregate production rate of doctors is great because of its more substantial power over the output of less distinguished medical schools. The delegation by the state legislatures 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 hand, the decision with respect to what is adequate training and an adequate number of doctors affects the pocketbooks of those who do the regulating as well as their closest business and personal associates. It is this power that has been given to the ASIA that is the cornerstone of the monopoly power that has been imputed by economists to organized medicine.23


The preceding analysis tells us nothing about the mechanism for controlling the price policies of individual doctors; it only implies that the rate of return on capital invested in medical training will be greater than the rate of return on capital invested in other classes of professional training. This difference in returns is imputable as a rent on the power of the AMA to control admissions to the profession by means of control over medical education. Here it will be argued that control over the pricing policies of doctors is directly and immediately related to AMA control of medical education. The relationship is that control over medical education is the primary instrumentality for control over individual price policies. More specifically, control over post-graduate medical training—internship and residency, and control over admission to specialty board examinations—is the source of the power over the members of the medical profession by organized medicine.


Part of nearly every doctor's medical education consists of internship and for many also a period of hospital service known as residency. Internship is a necessary condition for licensure in most states. This training is administered by hospitals. However, hospitals must be approved by the AMA for

23 Dollard, up. cit. supra note 21, concedes that medicine is a monopoly but argues that the AMA has used its power, by and large, in the public interest. Therefore, he implies that the monopoly power of the AMA has been unexploited, and the procession has acted against its own self interest.


intern and residency training, and most non-proprietary, i.e., nonprofit, hospitals in this country are in fact approved for at least intern training. Each approved hospital is allocated a quota of positions that can be filled by interns as part of their training. Hospitals value highly participation in internship and residency training programs. These programs are valued highly because at the prevailing wage for intern services it is possible to produce hospital care more cheaply with interns than without them. Interns to hospitals are like coke to the steel industry: in both cases, it is perfectly possible to produce the final product without these raw materials; in both cases, the final product can be produced more cheaply by using these particular raw materials.

There exist some grounds for suspecting that the wages of interns are maintained at an artificially low level, i.e., that interns receive compensation that is less than the value of their marginal product: (1) Hospitals are reporting that there is a "shortage" of interns and have been known to send representatives to Europe and Asia to invite doctors to serve as interns. (2) University hospitals are more aggressive bidders for intern services than non-university hospitals. The fraction of the available intern positions that are filled by university hospitals is greater than by non-university hospitals.25 If controls are exercised over what hospitals can offer in wages to interns, university hospitals are apt to be less vulnerable to the threat of loss of their class A hospital ratings than non-university hospitals. This would be true for the same reason that Johns Hopkins would have a freer hand in determining the size of its freshman class. The status of university hospitals is stronger because these hospitals are likely to be among the better hospitals in the country. Therefore, if controls over intern wages exist then it seems reasonable to suspect they would be relatively weaker over the wages of interns in university hospitals. For this reason, one would expect university hospitals to be more aggressive in bidding for interns.

However, whether or not interns are underpaid, the AMA has control over the supply of a vital, in an economic sense, agent of production for producing hospital care. Revocation of a hospital's Class A rating implies the loss of interns. In turn, the loss of interns implies higher costs of production. Higher costs of production result in a deterioration of the competitive position of any given hospital vis-a-vis other hospitals in the medical care market. This control over hospitals by the AMA has been used to induce hospitals to abide by the Mundt Resolution." This resolution advises hospitals that are certified for intern training that their staff ought to be composed solely of members of

24 "Congress to Probe Doctor Shortage", 33 Medical Economics 111 ;: June 1956

24 162 Journal of the American Medical Association 281 1956).

26 "By a long record of authoritative inspection and grading of facilities, organized medicine has placed itself in a position to deny alternatively the services of doctor and hospital to each other."" O. Garceau, Political Life of the American Medical Association, p. 109 (1941). 13

local medical societies.27 As a result of this AMA control over hospitals, membership in local medical societies is a matter of enormous importance to practicing physicians. Lack of membership implies inability to become a member of a hospital staff.28

County medical societies are for all practical purposes private clubs with their own rules concerning eligibility for membership and grounds for expulsion. A system of appeals from the rulings of county medical societies with respect to their members is provided. On the other hand, for non-members attempting to obtain membership in county medical societies, there is no provision for appeal. The highest court in the medical judicial system is the judicial Council of the AMA. Between this council and the county medical societies are state medical societies. Judicial review is bound by findings of fact made at the local level.29 For doctors dependent upon hospitals in order to carry out their practice, and presumably this constitutes the bulk of the profession, being cut off from access to hospitals constitutes a partial revocation of their license to practice medicine. Consequently, more doctors belong to their county medical associations than is true of lawyers with respect to local bar associations. More significantly, doctors are subject to very severe losses indeed if they should be expelled from their local county medical associations or be refused admission to membership. It is this weapon, expulsion from county medical associations, that is probably the most formidable sanction employed to keep doctors from maximizing their personal incomes by cutting prices to high income patients. "Unethical" doctors, i.e., price cutters, can be in large part removed as a threat to a structure of prices that discriminates in terms of income by the use of this weapon.°° For potential unethical physicians, it pays not to cut prices if cutting prices means being cut off from hospitals.

Thus far we have argued that control over the individual price policies of the members of the medical profession has been achieved by the AMA through its control over post-graduate medical education. By means of its power to

27 Hyde and Wolff. op. cit. note 19, at 952. The certification of hospitals for nursing training and the value of nursing training programs to hospitals may be on a par with intern training.

28 The strike is another instrument for control over hospitals by the AMA. Doctors have refused to work in hospitals that have admitted osteopaths to their staff. Hyde and Wolff, op. cit. supra note 19, at 96; M. M. Belli, Ready for the Plaintiff, p. 115 (1956). The threat of a strike has been used to induce hospitals to refuse staff membership to "unethical" doctors. Group Health Etc. vs. King Co. Med. Soc., 39 Wash. 2d 586, 624, 237 P. 2d 737, 757—758 (1951).

29 Hyde and Wolff, on. cit. supra note 19 at 919-950.

30 "Ethics has always been a flexible, developing, notion in medicine, with a strong flavor of economics from the start" Garceau, op. cit. supra note 26, at p. 106. Also consult the Hippocratic Oath.

certify a hospital for intern training, the AMA controls the source of supply of a crucial agent for the production of hospital care. Control over the supply of interns has been used to induce hospitals to admit to their staffs only members of county medical associations. Since membership in the county medical associations is in the control of organized medicine, and membership in a hospital staff is extremely important for the successful practice of most branches of medicine, the individual doctor can be easily manipulated by those who control membership in county medical associations.

Members of the medical profession are also subject to another type of control, derived from AMA control over post-graduate medical education, that is particularly effective over younger members. Membership in a county medical society is a necessary condition for admission to specialty board examinations for a number of specialties, and passing these examinations is a necessary condition for specialty ratings.31 Non-society members cannot win board membership in these specialties. This is a particularly important form of control over newcomers to the medical profession because newcomers tend to be young doctors who aspire to specialty board ratings." Consequently the AMA has particularly powerful sanctions over those who are most likely to be price cutters. These are young doctors trying to establish a practice.33


Just as one would expect an all-out war to reveal a country's most powerful weapons, substantial threats to the continued existence of price discrimination ought to reveal the strongest sanctions available to organized medicine. For this reason, the opposition or lack of opposition to prepaid medical plans that provide medical service directly to the patient ought to be illuminating. Generally speaking, there exist two classes of medical insurance. One is the cash indemnity variety. Blue Cross and Blue Shield plans fall within this class.34 Under cash indemnity medical insurance, the doctor and patient are

31 Hyde and Wolff, op. cit. supra note 19, at p. 952.

32 A statement of sanctions similar to that noted above appears in Restrictions on Free Enterprise in Medicine, p. 9 (April 1949), pamphlet, Committee on Research in Medical Economics.

33 Other things being equal, old well-established concerns tend to be more hostile to price cutting than younger concerns." G. Stocking and M. Watkins, Monopoly and Free Enterprise, p. 117 (1951).

34 Most of these plans have services provisions; that is, they agree to provide the service required to treat particular ailments only if the subscriber's income is below some pre-assigned level. Of the 78 plans approved by organized medicine, 58 have service provisions. Of these, only 3 provide service to all income classes. The remainder provide a cash indemnity to subscribers whose income exceeds the relevant pre-assigned income levels. Therefore, these plans do not interfere with the discriminatory pricing, policies of doctors. Consult Voluntary Prepayment Medical Benefit Plans, American Medical Associat ion (1954). 15

able to determine fees jointly at the time medical service is sold just as if there were no insurance. Therefore, this class of medical insurance leaves unaffected the power of doctors to discriminate between differences in demand in setting fees. If anything, doctors welcome insurance since it improves the ability of the patient to pay. On the other hand, for non-indemnity type plans, plans that provide medical services directly as contrasted with plans that provide funds to be used to purchase desired services, payments are typically independent of income. Costs of membership in such prepayment plans are a function of family size, age, coverage, quality of service, etc., but are independent of the income of the subscriber. Consequently, such plans represent a means for massive price cutting to high income patients. For this reason, the reception of these plans by organized medicine constitutes an experiment for testing the validity of the discriminating monopoly model. If no opposition to these plans exists, then the implication of the discriminating monopoly model —that some mechanism must exist for maintaining the structure of prices— is invalid. On the other hand, opposition to these plans by organized medicine constitutes observable phenomena that support this implication. If such opposition exists, then it supports the discriminating monoply hypothesis in addition to providing evidence of the specific character of the sanctions available to organized medicine.

A number of independent observers have found that a systematic pattern of opposition to prepaid medical service plans, as contrasted with cash indemnity plans, exists. "In many parts of the county, organized medical bodies have been distinctly hostile to group practice. This is particularly true where the group is engaged in any form of prepaid medical care."35 "Early groups were disparaged as unethical. But within recent years active steps have been taken only against those groups offering a plan for some type of flat-fee payment."36 "There is reason to believe that the Oregon, the San Diego, and the District of Columbia cases exemplify a nationwide pattern of behavior by the American Medical Association and its state and county subsidiaries. What has come into the open here is working beneath the surface in other states and counties."37 This systematic pattern of opposition to single price medical plans has taken two distinct courses. These are (1) using sanctions in an effort to terminate the life of prepaid medical plans already in existence and (2) lobbying for legislation that would abort their birth.

There have been a number of dramatic battles for survival by prepaid non-price discriminatory medical plans resulting from the efforts of organized medicine to destroy them. These struggles have brought into action the most

35 Building America's Health, report to the President by the Commission on the Health Needs of the Nation, V. I, p. 34 (1952).

36 Hyde and Wolff, op. cit. supra note 19, at p. 977.

37 Op. cit. supra note 32, at p. 14. 16

powerful sanctions available to organized medicine for use against price cutters. Consequently, the history of these battles provides valuable evidence of the character of the weapons available to the participants. For this purpose, the experiences of the following organizations are particularly illuminating: Farmers Union Hospital Association of Elk City, Oklahoma, the Kaiser Foundation of San Francisco and Oakland, Group Health of Washington, Group Health Cooperative of Puget Sound, Civic Medical Center of Chicago, Complete Service Bureau of San Diego, and the medical cooperatives in the State of Oregon. These plans are diverse, from the point of view of location, organization, equipment, sponsorship and objective. However, they all have one crucial unifying characteristic—fees or service charges are independent of income." Similarly, the experiences of Ross-Loos in Los Angeles and the Palo Alto Clinic in California are illuminating because these organizations both operate prepayment single price medical plans and nevertheless continue to stay within the good graces of organized medicine.

The founder and director of the cooperative Farmers Union Hospital in Elk City, Oklahoma, Dr. Michael A. Shadid, was harassed for a number of years by his local county medical association as a consequence of founding and operating this price cutting organization. He was ingeniously thrown out of the Beckham County Medical Society; this organization was dissolved and reconstituted apparently for the sole purpose of not inviting Shadid to become a member of the "new" organization. Before founding the cooperative, Shadid had been a member in good standing in his county medical association for over a decade.

The loss of hospital privileges stemming from non-county society membership was not sufficient for the task of putting Shadid out of business, because his organization had its own hospital. Therefore, organized medicine turned to its control over licensure to put the cooperative out of business. Shadid was equal to this challenge. He was shrewd enough to draw members of the politically potent Farmers Union into his organization. Therefore, in the struggle to take away Shadid's license to practice medicine, the farmers were pitted

38 The Health Insurance Plan of New York is not included in the foregoing enumeration hecause charges are not completely independent of income. For determining premiums, families are divided into two groups, those with incomes above $6,500 are assessed premiums twenty per cent greater than those applicable to the lower income group. Consult M. M. Davis, Medical Care for Tomorrow, p. 237 (1955). However, as a threat against the structure of prices for medical services based on income, this plan is almost as potent as those listed. Consequently, the opposition to it ought to be just about as severe and the weapons employed just as interesting for gaining insights into the nature of the sanctions over the behavior of individual doctors by organized medicine.

Available evidence suggests that HIP is under attack. See the testimony of G. Baehr, President and Medical Director of HIP in Hearings, op. cit. note 9, at pp. 1604, 1642, and 1663. Legislation that would outlaw such plans as HIP has been sponsored by organized medicine. Consult N.Y. Times, p. 15, col. 5 (Feb. 21, 1954). 17

against the doctors. The doctors came out of this political battle the losers because the state governor at the time, Murray, sided with the farmers.39 However, the Beckham County Medical Society has been powerful enough to keep doctors who were known to be coming to Oklahoma to join Shadid's organization from getting a license to practice, powerful enough to frighten and cause the departure of a doctor who had been associated with Shadid's organization for a substantial period of time, powerful enough to keep Shadid out of a two-week postgraduate course on bone fractures at the Cook County Graduate School of Medicine (the course was open only to members in good standing of their local county medical societies), and was able to get enough of Shadid's doctors drafted during the war to endanger the life of his organization.40 In recent years, the tide of battle has turned. The Hospital Association brought suit against the Beckham County Medical Society and its members for conspiracy in restraint of trade. This case was settled out of court. As part of this settlement, the county medical association agreed to accept the staff of the cooperative as members.

The experience of the Kaiser Foundation Plan is parallel to that of the Farmers Union. Both were vigorously opposed by organized medicine. The medical staff in each case could not obtain membership in local county medical societies. In both cases, the plans were able to prosper despite this obstacle, since they operated their own hospitals. In both cases, the doctor draft was used as a tool in an attempt to put these plans out of business.41

Control by organized medicine over licensure was used as a weapon in an attempt to kill the Kaiser Plan. Dr. Sidney Garfield, the plan's medical director, was tried by the State Board of Medical Examiners for unprofessional conduct. Garfield's license to practice was suspended for one year and he was placed on probation for five years. However, the suspension was withheld pending good behavior while on probation. This ruling by the State Board of Examiners was not supported in Court. Superior Court Judge Edward P. Murphy ordered the board to rescind all action against Garfield. The judge ruled that the board was arbitrary in denying Garfield a fair trial. Subsequently the appellate court reversed the decision of the trial court on one count but not the second. Nevertheless the judgment of the trial court in

39 Davis argues that Shadid would have lost his license to practice if he had not had the powerful political support of the farmers. Op. cit. supra note 38 at p. 229.

40 The story of Shadid and his organization may be found in A Doctor for the People (1939), and Doctors of Today and Tomorrow (1941). In Two Harbors, Minnesota, doctors associated with a medical-society-disapproved plan could not win admission to their local county medical society and a doctor associated with this plan could not get into the same school from which Shadid had been barred—the Cook County Graduate School of Medicine. 71 Christian Century, 173 (Feb. 10, 1954).

41 For evidence on this point for the Kaiser Plan, see Hearings before a Subcommittee of the Senate Committee on Education and Labor, pt. 1, p. 338 ff., 77th Cong. 2nd Sess. on S. Res. 291 (1942). 18

rescinding the decision of the board of examiners was upheld. The entire matter was sent back to the board for reconsideration of penalty.42 Subsequently, Garfield was tried by the county medical association for unethical practices, namely advertising, and found guilty. However, he came away from this trial with only a reprimand and not the loss of his license." By virtue of having its own hospitals and legal intervention by the courts against the rulings of organized medicine, the Kaiser Foundation has been able to resist the onslaughts of its foes. However, the battle is not over vet. Although Kaiser Foundation doctors are now admitted to the Alameda County Society, the San Francisco County Society still excludes them.44

Group Health in Washington was not as fortunate as Kaiser or Farmers Union with respect to hospitals. Unlike these other two organizations, Group Health did not have its own hospital and therefore was dependent upon the existing hospitals in the community. Consequently, when Group Health doctors were ejected from the District Medical Society. Group Health was seriously crippled. Nearly all the hospitals in the district were coerced into denying staff privileges to Group Health doctors and bed space to their patients. Moreover, many doctors were deterred from becoming members of the Group Health staff because of fear of punitive action by the District Medical Society. Still other doctors who were members of the Group Health medical staff suddenly discovered attractive employment possibilities elsewhere and resigned their Group Health positions.45

It was fortunate for Group Health that it was located in Washington, D.C. and therefore under the jurisdiction of federal laws, in particular the Sherman Act. The tactics of the District Medical Society and the AMA came to the attention of the Justice Department. This led to the successful criminal prosecution of organized medicine under the Sherman Act. The opinion of the Supreme Court delivered by Mr. Justice Roberts pinpoints the primary concern of the petitioners, the District Medical Society and the AMA.

"In truth, the petitioners represented physicians who desired that they and all others should practice independently on a fee for service basis, where whatever arrangement for payment each had was a matter that lay between him and his patient in each individual case of service or treatment."46

42 P. DeKruif, Life Among the Doctors, p. 416 (1949). The last two chapters of this book deal with the activities of organized medicine against the Kaiser Plan. For the decision of the appellate court, see Garfield v. Medical Examiners, 99 C. A. 2d 219, 221 P. 2d 705 (1950).

43 Mayer reports that Dr. Louis Schmidt, the urologist, was expelled from organized medicine for advertising his venereal disease clinic. 180 Harpers 27 (Dec. 1939).

44 Means, op. cit. supra note 5, at p. 131. Opposition to Kaiser also exists in Los Angeles area where this plan also operates. 83 Bull; tin of the Los Angeles County Medical Society 301 (1953) contains a condemnation of the Kaiser Plan and a call-to-arms.

45 Hyde and Wolff, op. cit. supra note 19, at p. 990.

46 American Medical Association v. United States, 317 T.S. 519, 536 (1943). 19

As a result of this victory, consumer sovereignty with respect to Group Health was restored. As might be suspected from the intense opposition of the AMA and the District Medical Society, Group Health has shown unusual survival properties and flourishes in competition with fee-for-service medical care. Since its victory at court, good relations with the District Medical Society have been achieved by the Group Health staff.47

In view of the previous cases cited, the experience of the Group Health Cooperative of Puget Sound, Washington, takes on a familiar cast. The King County Medical Association objected to this prepayment plan. They claimed it was "unethical" because under the terms of the plan subscribers could not employ any doctor in the community. Subscribers could use only doctors who were members of the health plan. Staff members of Group Health were expelled from the county medical association and new additions to the Group Health staff were found ineligible for society membership. The local medical society refused to accept transfers of membership from other county medical associations of doctors who expected to join the staff of the cooperative. The Group Health staff was unable to use the existing hospitals of the community, thereby limiting the value of the plan to many members and potential members. Moreover, the staff was cut off from many scientific meetings and was unable to consult with the orthodox members of the profession. However, the cooperative survived despite the hostility of the county medical society.

As a direct consequence of these harassing measures adopted by the King County Medical Society, the cooperative brought action against the county medical society, charging that the defendants had conspired against them in an effort to force the cooperative out of business. This case went to the state supreme court and was won by the cooperative although no damages were allowed.48 Mr. Justice Hamley said that

"The purpose of the Society . . . has been primarily to benefit the members of the Society and its affiliates through the elimination of such competition. The means employed has . . . been oppressive in the extreme. ..."'49

Subsequently, the justice went on to argue that the activities of the county medical association against Group Health were designed to eliminate competition in the contract medicine field.50 The court ruled that the defendants should not exclude applicants from membership in the county medical society or hospitals because of their affiliation with Group Health, and should cease discouraging doctors from joining Group Health or consulting with its staff."

47 Becker, President, Group Health _Association. Hearings before Senate Committee on Education and Labor, pt. 5, p. 252S, 79th Cong. 2nd Sess. on S. Res. 1606 (1946).

48 Group Health Etc. v. King Co. Med. Soc., 39 Wash. 2d 586, 237 P. 2d 737 (1951).

49 Ibid., at p. 622 and 757.

50 Ibid., at p. 640 and 766.

51 Ibid., at p. 664 and 780; Consult Means, op, cit. supra note 5, at pp. 177-181. 20

In testimony before a Senate Committee, Dr. Lawrence Jacques of the Civic Medical Center in Chicago reported that none of the staff of this medical center (it numbered fifteen at that time) had succeeded in being admitted to the county medical association.52 Repeated applications for admission had either been ignored or rejected by the Chicago Medical Society. Appeals to the Illinois State Medical Society and the American Medical Association proved to be fruitless. A direct appeal by a committee of patients of the Civic Medical Center to the county medical association on behalf of their doctors was of little avail.

The doctors associated with the Complete Service Bureau of San Diego could not obtain membership in the county medical society and the patients and doctors associated with the plan were barred from the major hospitals of San Diego County. The county society published paid advertisements in the current editions of the San Diego telephone directory designating the members of the San Diego Medical Society among the physicians listed in the directory. These advertisements contained statements that gave the impression that non-society members were not qualified to practice medicine for professional and moral reasons. As a result of society opposition, the bureau had difficulty in hiring doctors at the going market price for their services.53

In Oregon, doctors serving on the staff of medical cooperatives were expelled from county medical societies and hospital facilities were made available only to doctors and the patients of doctors who were members in good standing of their local medical societies. Moreover, society members systematically refused to consult with non-society members and spread false propaganda in an effort to discredit society opposed plans.54 The government brought action against the Oregon Medical Society under the Sherman Act and lost.55

The Civic Medical Center in Chicago did not have its own hospital. The members of the center were able to practice in only two hospitals in the entire Chicago area, and in neither of these two hospitals did they have full staff privileges. These limited staff privileges seriously hampered the operations of the group in the two hospitals in which they could practice. For example. in one of the hospitals surgical cases could not be scheduled for more than two days in advance by a physician unless he was a full staff member.

52 Hearings, op. cit. supra note 47, at p. 2630 ff.

53 Op. cit. supra note 32, at p. 11.

54 Ibid.

55 For the reasons for this loss, see United States v. Oregon Med. Soc., 343 U.S. 326 (1.932) and the discussion of the case in Hyde and Wolff, op. cit. supra note 19, at p. 1020. One gets the impression from reading this case that the practices of the state society that would have led to victory for the government were discontinued in 1941. 21

In the words of Jacques,

"The handicaps of nonmembership in the local medical society are serious and far-reaching and in effect amount to a partial revocation of licensure to practice medicine."56

During the war, some of the men in this group were disqualified for service as medical officers in the Navy, but nevertheless draftable as enlisted men, because applications to serve as medical officers were automatically rejected unless accompanied by a letter certifying that the candidate was a member in good standing of his local county medical society.57 When Jacques was asked why his group was being excluded from the county medical association, his response was:

"The evidence at hand suggests . . . that we are being excluded because of our prepayment plan."58

Apparently the value of price discrimination is deemed to be so great that the AMA has opposed "free" medical care to veterans by the Veterans Administration.59 Free VA care for veterans would increase enormously the quantity of medical services demanded by making the marginal costs of these services zero for veterans.60 Moreover opposing free care to veterans comes at a great cost to organized medicine.61

56 Hearings, op. cit. supra note 47, at p. 2642.

57 Apparently this rule is no longer in effect. Consult Hyde and Wolff, op. cit. supra note 19, at p. 951 n. 34.

58 Hearings, op. cit. supra note 47, at p. 2644.

59 It seems likely that the value of price discrimination has increased in recent years. In the last two decades, there has been a widespread development of consumer credit. This development has made it possible for credit bureaus to collect extensive and reliable data on consumer incomes. Such data are available to subscribers to credit bureau services. Therefore, doctors that belong to credit bureaus are able to price discriminate more precisely than would have been possible if they had to rely on the unsupported testimony of patients for income data. ". . . routine credit check of patient who had always been billed at modest rates—and learned that he was in fact the owner of thirty oil wells!" Mills, Credit Ratings: How You Can Use Them, 33 Medical Economics 171, 172 (May 1956).

60 AMA opposition to free medical care for veterans constitutes evidence against the hypothesis that the AMA opposes direct service non-indemnity type group plans because they increase the efficiency with which medical resources are employed and therefore effectively increase the supply of doctors. Still stronger evidence against the rationalization of opposition to direct service prepayment p'ans as a manifestation of opposition to chances that increase the efficiency with which the existing stock of doctors can be utilized, i.e., increase the supply schedule of physicians services, is the relative lack of opposition to group practices. Therefore, unless one is willing to postulate that it is the method of payment associated with prepayment medical plans that is a source of efficiency, one cannot argue that opposition to prepayment plans is on a par with the destruction by workers of machines that improve workers' efficiency.

"Group practice of medicine on a fee-for-service basis is tolerated and even admired by most doctors. The entire profession also strongly advocates voluntary medical insurance. Yet many physicians and some local medical societies violently disapprove of the combination of group practice with pre-payment and do everything in their power to present or destroy it." Baehr, Hearings, op. cit. supra note 9, at p. 1642.

61 This opposition has won organized medicine a powerful foe. A. J. Connell, an ex-National Commander of the American Legion has attacked organized medicine as a "most powerful and monopolistic medical guild." N.Y. Times, p. 17, col. 3 (Jan. 29, 1954). In opposing "socialized medicine" these two groups were allies.

If price discrimination is in fact highly valued by organized medicine and prepayment direct service medical plans have been opposed in order to maintain a structure of discriminating prices, doesn't the existence of the prepayment plans unopposed by the AMA constitute an anomaly?62

How can the Ross-Loos and Palo Alto Clinic cases be explained?63 The Ross-Loos plan in Los Angeles is a prepaid medical plan that is a profit-seeking organization. It was started in 1929 and by the end of 1952 had 127,000 members.`' The Ross-Loos plan does not have hospitals of its own and is therefore forced to rely on the existing hospitals of the community. Consequently, the condemnation of this plan by organized medicine which occurred after it won acceptance from consumers in the medical care market, represented an enormous threat to its continued existence. The Ross-Loos plan doctors were expelled from the Los Angeles County Medical Association. Among the doctors to lose their county society membership was a former President of the Los Angeles County Medical Society. As a result of a number of appeals to higher courts, all within the judicial machinery of organized medicine, the decision that would have crippled if not destroyed this plan was reversed.

An excellent reason for this reversal is suggested by the testimony of Dr. H. Clifford Loos, a co-founder of Ross-Loos. In response to the question, "Are you handicapped to any extent by the fact that you are not able to advertise," Dr. Loos replied:

As far as that goes, we do not care to be big, or bigger. If I had accepted all of the groups who applied to us. we would need our city hall to house us. We have put the brakes on. We can't accept too many. We feel we can't be too big.65

This constitutes strange behavior indeed for a profit-seeking institution that certainly ought to have no fears of Justice Department action for either being too large or monopolizing an industry. One cannot help suspecting that the

62 Evidence of opposition to price cutting on a more modest scale exists. Individuals who have cut prices have either encountered the sanctions of organized medicine or a threat to employ these sanctions. Consult, Medical Group's Protests Stop Polio Shot Project in Brooklyn, N.Y. Times, p. 33M (Sept. 12, 1956). The Los Angeles Times reports that Dr. Sylvan O. Tatkin filed a complaint in the Superior Court of Los Angeles charging that the local association was engaging in unlawful rate fixing. Tatkin charged that he was refused membership in the local society and therefore dropped from the staff of Behrens Memorial Hospital in Glendale as a result of price cutting. L.A. Times, sec. 2, p. 30, col. 4 (June 29, 1956).

Economic theory implies that there would be no point for a monopolist that has control over supply being concerned with prices directly. For a non-discriminating monopolist, control over supply implies control over prices.

63 There is evidence that opposition to prepayment plans is not merely local society policy. In Logan County, Arkansas, the entire county society was expelled from the state society by means of charter revocation. The local society was dominated by physicians participating in a disapproved plan. 27 Journal of the Arkansas Medical Society 29 (1930).

64 Hearings, op. cit. supra note 9, at p. 1451. " Ibid., at p. 1469.


amicable relations with the Los Angeles County Medical Society may have been acquired at the cost of a sharply curtailed rate of expansion.66

The Palo Alto Clinic in California provides prepaid medical care that is non-income discriminating to the students, employees, and faculty of Stanford University. This constitutes a small fraction of the clinic's business; Eighty-five per cent of the receipts of the clinic are attributable to conventional fee-for-service practice that lends itself to discriminatory pricing. This clinic continues to stay within the good graces of organized medicine. When questioned about extending the prepaid non-discriminatory service, Dr. Russel V. Lee, Director of the Clinic and Professor of Medicine in the School a Medicine of Stanford University, threw some light upon this apparent anomaly.

"Several of the industries in the area have come to us for such service We have been trying to get our county medical society approval before we ge into these things, and we are doing a little job of county medical education because in general the county medical society will not approve of anything that smacks of a closed panel."67

This suggests that the Palo Alto Clinic is in the position of having to go to its principal competitors for permission to sell its services to new customers. This is comparable to a requirement that a Ford dealer must first obtain the permission of his competing Chevrolet dealer before he can sell Fords to non-Ford owners who have asked for the opportunity to buy them. Probably the county medical society that includes the Palo Alto Clinic does not feel that the present level of sales of prepaid medical services by this clinic is high enough to justify the costs and risks of punitive action.

Organized medicine, i.e., the AMA and its political subdivisions, has opposed prepaid non-price-discriminatory medical plans not only directly by fighting against them but also indirectly by lobbying for legislation that would make such plans illegal. State medical societies have achieved a fair degree of success in sponsoring legislation designed to prevent price cutting in the medical care market caused by prepaid medical plans. As of 1954, "there are at least 20 states that have had such laws passed at the instigation of medical societies, which are designed to prevent prepaid group practice and to keep medical practice on a fee-for-service solo basis.68 Another source says:

66 Loos has also served as an expert witness for the San Diego County Society during its struggle with another prepayment plan. Complete Service Bureau v. San Diego County, Med. Soc., 43 C. 2d 201, 212, 272, P.2d 497, 504 (1954). Hyde and Wolff. op. cit. supra note 19, at p. 985 impute the tolerance of Ross-Loos by organized medicine to the fact that it is physician sponsored as contrasted with being lay or non-physician sponsored. The theory, outlined in this paper implies that this is not a relevant distinction.

67Hearings op. cit. supra note 9, at p. 1559.

68 Baehr, Hearings, op. cit. supra note 9, at p. 1594. Very unorthodox lobbying tactics have been successfully employed by distinguished doctors to achieve the legislative goals of organized medicine. See Osler's forthright description in H. Young. A Surgeon's Autobiography, p. 407 (1940). 24

"Most of the states now have restrictive statutes permitting only the medical profession to operate or to control prepayment medical care plans."69

Hansen lists as one of the primary objectives of this legislation "to preserve the fee-for-service system as far as possible by controlling the financial administration of the plans."' °


In the preceding section, this paper has been concerned with establishing the validity of the discriminating monopoly model for understanding the pricing of an important class of medical services—those produced by doctors in hospitals. Evidence of the existence of a pattern of relatively direct and obvious controls was presented. Yet it was argued that maintaining a structure of discriminatory prices for this large number of independent producers represents a fantastically difficult control problem. Does the existence of this difficult control problem shed any light upon other aspects of the medical profession? Our concern is largely with the more subtle or less obvious methods of control over the price policies of individual doctors.

The controls previously discussed are analogous to surgery; the controls to be discussed are analogous to preventive medicine. In particular, we explore the possibilities of a relationship between maintaining a structure of prices based on income differences and: the representation of specialists in power positions within organized medicine; discrimination against minority groups in admission to medical schools; the free treatment by doctors of other doctors and their families; the position of organized medicine on advertising; the defense of county medical association members against malpractice suits; the no-criticism rules that forbid unfavorable comment by one physician of another physician's work before a member of the lay public.

Specialists have more to gain from price discrimination than non-specialists because their work is more likely to be associated with hospitals. The power to withhold hospital facilities from doctors constitutes the strongest weapon for maintaining price discipline within the medical profession. Therefore, discrimination in pricing ordinary office visits as compared with services rendered in a hospital is much less pronounced. In fact, prices charged for office visits ought to be relatively independent of patient's incomes. Office care can be provided by doctors with no hospital connections whatsoever. Consequently, specialists, particularly those who do most of their work in hospitals, have a

Hansen, Laws Affecting Group Health Plans, 35 Iowa L. Rev. 209, 225 (1950).

Ibid., at p. 209. Yet in his conclusion, Hansen argues that "Farsighted medical societies should find no valid reason for opposing group health enahing legislation. Instead they should welcome experimentation in the field of medical economics with the same spirit they welcome it in the field of medical science." pp. 235-36. It is one of the implications of this paper that the more farsighted medical societies provide the strongest opposition to experimentation in the field of medical economics. 25

greater interest in maintaining price discrimination than general practitioners.. Therefore, the fact that specialists are over-represented, as measured by the ratio of specialists to all doctors, in the AMA hiararchy is no accident.71 This is precisely the group that has the greatest economic interest in maintaining price discipline and for this reason, are "naturals" for the job.72

Newcomers, even if they were formerly presidents of county societies elsewhere, are probationary members when they join some county societies.73 They achieve full membership only after a successful term as probationary members. Relegating newcomers to a probationary status is a means for segregating from the general membership those who have a relatively high probability off being price cutters.74 Newcomers represent a group whose members are trying to acquire practices and therefore are more likely to be price cutters than society members who have well established practices. Consequently newcomers require both an extraordinary degree of surveillance and a strong indication off the costs of non-compliance. Probationary membership achieves both of these. objectives.

The advertisement of medical services is approved by the medical profession if and only if such advertisements redound to the interest of the profession as a whole. Advertisements in this class are. for example, announcement of the availability for sale of Blue Cross type medical plans. These plans allow their subscribers the choice of any licensed practitioner. Organized medicine consequently takes the position that these advertisements are of benefit to the entire profession. On the other hand, advertisements that primarily redound to the interests of a particular group, for example, advertisements by a closed panel medical group, are frowned upon. Advertisements in this class are, bv, definition, resorted to only by "unethical" doctors. Why this difference in the

71 Garceau, op. cit. supra note 26, at pp. 55-58. Hyde and Wolff, op. cit. supra note 19, all p. 97

72 Some observers have explained the over-representation of specialists in the AMA hierarchv as attributable to their greater incomes. Larger incomes imply that specialists are better able to afford the "luxury" of political activity. This explanation implies that psychiatrists and dermatologists ought to be just as over-represented as surgeons, abstracting from income differences. On the other hand, the argument advanced here implies that surgeon ought to be more strongly represented because membership in the AMA hierarchy can be more useful for advancing the economic interests of surgeons than it can be for those other specialties. This difference stems from the fact that psychiatrists and dermatologists do not use hospitals to the same extent in their practices.

There exists some reason for believing that among specialists, surgeons are over-represented) in medical politics. One observer reports, "Our medical societies are not merely specialist-dominated: they are surgeon dominated." Berger, op. cit. supra note 11, p. 272.

73 Hyde and Wolff, or. cit. supra note 19, at p. 941 n. 20 and p. 931 n. 83.

74 Stocking and Watkins, op. cit. supra note 33, at p. 117.

75 Some societies have indoctrination programs for newcomers. Drennen, "They Help Young Doctors Get Started Right", 32 Medical Economics. 104 ( Tune, 1953). Drennen observes that for the newcomer such a program "... helps keep him on the path of righteousness." p. 108.. 26

position of organized medicine with respect to these two classes of advertising? The approved class, insofar as it achieves its objective, tends to increase the aggregate demand for medical care. On the other hand. the disapproved variety will have the effect of reallocating patients from the profession as a whole to those who advertise. Consequently, advertising in this class constitutes competitive behavior and leads to price cutting. It tends to pit one doctor or one group of doctors against the profession as a whole with respect to shares of the medical care market. Active competition for increased shares of the medical care market by doctors would tend to eliminate price discrimination based on income differences.

The significance of advertising as a means for maintaining free entry is revealed by two bits of interrelated evidence. These are the strong opposition of organized medicine to advertising calling the public's attention to the services of a particular group of doctors and the willingness of some prepaid medical plans to incur the wrath of organized medicine by undertaking such advertising. Kaiser, the Civic Medical Center, and the Complete Service Bureau at one time or another advertised.76 The use of advertising in the face of strong opposition by organized medicine implies that advertising plays a crucial role in enabling these groups to capture part of the medical care market. Consequently the ban on such advertising by organized medicine constitutes a barrier to entry into this market and is a means for keeping doctors from competing with one another and thereby incidentally destroying the structure of prices.

County medical societies play a crucial role in protecting their members against malpractice suits. Physicians charged with malpractice are tried by their associates in the private judicial system of organized medicine. If found innocent, then local society members are available for duty as expert witnesses in the defense of those charged with malpractice. Needless to say, comparable services by society members for plaintiffs in such actions are not equally available. By virtue of this monopoly over the services of expert witnesses and the tacit coalition of the members of a society in the defense of any of their members, the successful prosecution of malpractice suits against society members is extremely difficult.

On the other hand, for doctors who are persona-non-grata with respect to organized medicine, the shoe is on the other foot. Expert witnesses from the ranks of organized medicine are abundantly available for plaintiffs but not for defendants. Therefore the position of a plaintiff in a suit against a non-society member is of an order of magnitude stronger than it is for a suit

76 "For the first ten months of its existence, with a considerable reluctance it continued the policy of institutional advertising, because it was felt that the clinic could not survive unless it was brought actively to the attention of the public." Jacques, Hearings, op. cit. supra note 41, at p. 2634. Complete Service Bureau v. San Diego County Med. Soc., 43 C.2d 201, 214—216, 272 P.2d 497, 504—506 (1954). 27

against a society member. Consequently it should come as no surprise that tho costs of malpractice insurance for non-society members is substantially higher than it is for society members. Apparently some non-society members have experienced difficulty in obtaining malpractice insurance at any price.77

This coalition among the members of the medical profession not to testify against one another, like structured prices, puts some doctors in a position of pursuing a policy that does not maximize personal returns. Therefore more than just professional ethics makes this coalition viable. As might be expectedi the ability of organized medicine to expel doctors from hospital staffs plays crucial role in keeping doctors from testifying against one another. Belli re ports that a doctor who acted as an expert witness in a malpractice suit h(l tried was subsequently barred from the staff of every hospital in California.? It is because of sanctions of this character that we can find reports of patient: with strong prima facie evidence of negligence and yet unable to hire expert witnesses from the ranks of the medical profession.70

As a result of this coalition among society members for malpractice defense two effects are achieved. The more direct and obvious consequence is an in crease in the monopoly returns to the members of this profession over what they otherwise would be. The other is the welding together of the medical profession as an in-group. In this latter role, the coalition for malpractice defense is a force that has the same effect as a reciprocity, that is, the free treatment by, doctors of other doctors and their families, and the rule that doctors are not to criticize one another in public.b0 The function of reciprocity and no-criticism is to induce the members of the medical profession to behave to, wards one another as if they were members of an in-group. Doctors are subtly coerced into personal relations with one another. Insofar as these measures bear fruit, doctors view themselves as a large association in which member:, deal with one another on a personal level. In relation to the general public: i.e., outsiders, the in-group, doctors. are united.

But what does the medical profession achieve by subtly coercing its members

77 Garceau, op. cit. supra note 26, at p. 103 ff; Jacques, Hearings. op. cit. supra note 47, at p. 2642 ; Hyde and Wolff, op. cit. supra note 19, at p. 951 n. 86; Belli, op. cit. supra note 28; at p. 109.

78 Belli, op. cit. supra note 2S, at p. 98; The California Malpractice Controversy, 9 Stanford L. Rev. 731 (1957).

79 See the story by Ullman in the Toledo Blade of June 12, 1946, about a surgery patient who was unable to hire an expert witness for demonstrating negligence in a case involving a sponge that a surgeon forgot to remove before sewing up the patient. Belli reports no such problem in hiring expert witnesses for legal malpractice cases. Op. cit. supra note 28, at p. 95

80 N. S. Davis, History of Medicine, ch. 14 (1907) ; Wylie, "Conspiracy of Silence", 29 Medical Economics 167 (April 1952) ; "Doctor Fights Expulsion on Slander Charge," 32 Medical Economics 269 (Dec. 1954). This is the story of a doctor expelled from his county medical society for expressing opinions about the professional competence of his colleagues, to patients. 28

into in-group relations with one another? The relationships among members of a family, an in-group par excellence, reveal the importance of these subtle controls. Members of a family are relatively reluctant to criticize one another before outsiders, tend not to charge each other market prices for services extended to one another, and try to avoid being in direct competition. The essence of in-group behavior is personal relationships among its members. On the other hand, the essential property of market place relationships is impersonality. Consequently insofar as a non-market place attitude can be fostered and maintained within the medical profession, such an attitude constitutes a barrier against doctors thinking of one another as competitors in the medical care market. This in itself constitutes a barrier against such market place activities as cutting prices.81

To the extent that the culture of members of an in-group is distinct from that of non-members, this difference reduces the probability that non-members can successfully "join" the in-group. Differences in culture and values constitute a natural barrier to integration. This is particularly important for medicine because it is both a social and an economic club and the returns of the economic club are related to the degree of social cohesion that exists within the social club. Consequently, members of culturally distinct minority groups would be more difficult to assimilate into such an in-group and it is likely that many would never feel that they were completely members under the best of circumstances. This implies that members of such minority groups would be more difficult to control by means of the informal controls characteristic of in-groups. Being thrown out of a country club is not much of a loss if one is only the janitor; for informal controls to be effective, they must be exercised over those who belong. Insofar as some minority groups are more difficult to assimilate, there exists an a priori basis for discrimination. It is to keep out those who have a higher probability of not being willing to go along with the majority. Minority groups whose culture and values are different from those of the majority could rationally be discriminated against in admission to medical schools because they are more difficult to control by informal controls after they are out in medical practice than is characteristic of the population at large.

The discrimination against Jews in admission to medical schools has been

81 If the hypothesis presented here is correct, then it should be possible to observe a difference between the variance of surgical and psychiatric fees after abstracting from variations caused by differences in skills, type of operation and difficulty of particular cases. This dif- ference would be imputable to the strong control over the pricing of surgical services by means of control over hospitals. Since reciprocity and no-criticism rules are viable because they help maintain structured prices, they should not be observed as rigorously by psychiatrists as surgeons. On this latter point, there exists evidence consistent with the hypothesis presented here. Psychiatrists have been the first, and thus far the only group within the medical profession to abandon reciprocity. Miller, "Doctors Should Pay for Medical Care!", 30 Medical Economics 82, 84 (Jan. 1953). 29

explained, by both Jews and non-Jews alike, as a consequence of irrational prejudices.82 Yet Jews might be regarded as the prototype of a minority group with cultural properties that, given the special problems of maintaining internal discipline within the medical profession, would make them undesirable candidates for admission to this profession. These cultural attributes evolved as a consequence of centuries of unparalleled persecution. This persecution, which by and large was economic, took the form of laws that barred Jews from particular product and labor markets in many of the most important countries in the history of western civilization. Cartels such as guilds followed similar policies. This exclusion policy channelled Jews into highly competitive markets, markets characterized by free entry, and forced them to develop their commercial skills to a higher level than was characteristic of the population at large in order to survive economically. For Jews, a medieval guild type share-the-market attitude was a non-survival property whereas a policy of vigorously competing was a survival property. The process of adaptation by Jews to laws constraining their economic activities led them to develop considerable ingenuity in minimizing the impact of such laws upon their economic well being. Jews developed into robust competitors with little respect for rules, either government or private, that regulated economic activities and with a substantial body of practical experience in implementing this point of view.83 These attitudes became a part of Jewish cultural tradition

82 For direct evidence on discrimination against Jews in admission to medical schools, consult, Hart, "Anti-Semitism in Medical Schools," 63 American Mercury 53 (July 1947) Kingdon, "Discrimination in Medical Colleges," 60 American Mercury 391 (Oct. 1945) Bloomgarden, "Medical School Quotas and National Health," 15 Commentary 29 (Jan. 1953) Goldberg, "Jews in the Medical Profession—A National Survey," 1 Jewish Social Studies 327 (1939) ; Shapiro, "Racial Discrimination in Medicine,: 10 Jewish Social Studies 103 (1948).

The indirect evidence on this point seems to be more convincing than the direct evidence. Practically all of the Americans who study medicine abroad are Jews. No comparable evidence for the study by American Jews of law, dentistry, accounting, engineering, etc. in foreign countries exists. Therefore, the hypothesis that Jews prefer to study abroad is not tenable. On the other hand, this evidence is consistent with the hypothesis that Jews are strongly discriminated against in this country. Consult Levinger, "Jewish Medical Students in America," 2 Medical Leaves 91, 94 (1939) and Goldberg, supra at p. 332.

Some observers have used a Noah's Ark approach to determine whether or not discrimination against Jews in admission to medical schools exists or existed. Because the ratio of Jewish medical students to all medical students exceeds the ratio of all Jews to our total population, some observers have concluded discrimination is absent. D. S. Berkowitz, Inequality of Opportunity in Higher Education. (1948).

The same problem of survival in a hostile world has led a number of observers to argue that the frequency of Jews among alcoholics, dope addicts, and child deserters is low relative to the non-Jewish population. This same argument has been used to conclude that the frequency of Jews among neurotics is higher. Morrison, "A Biologic Interpretation of Jewish Survival," 3 Medical Leaves 97 (1940) ; Meyerson, "Neuroses and Alcoholism Among the Jews," 3 Medical Leaves 104 (1940) ; Liber, "The Behavior of the Jewish and the Non-Jewish Patient,"Medical Leaves 159 (1943).

There exists evidence that Jews are under-represented among prison inmates. Levinger, "A Note on Jewish Prisoners in Ohio," 2 Jewish Social Studies 210 (1940). This is what the survival hypothesis suggests. It is significant to note, however, that this under-representation is not uniform for all categories of crime. The representation of Jews among prison inmates convicted of crimes of scheming, i.e., fraud, larceny, possession of stolen property, etc., is relatively large. Laws regulating economic affairs, unlike most laws, were directed against Jews. Hence one should expect to find respect by Jews for this category of laws weakest. By this argument a post-war study of prison populations ought to show a relatively large representation of Jews among OPA violators.

and at least in this respect, distinguished Jews from non-Jews. This was particularly true of Jews that came from Czarist Russia and Poland where discrimination against them was particularly strong.84

Because of these special cultural properties, which are vestigial in the United States and therefore are in the process of fading away, the discrimination against Jews in admission to medical schools is far from irrational if one is concerned with maintaining price discrimination in medicine. The a priori probability of a Jew being a price cutter because of the special attributes developed in an effort to survive in a hostile environment is greater than that for a non-Jew. The Jewish doctor is more likely to have a commercial market place attitude towards other members of his profession than is the non-Jew. From the point of view of the medical profession. as one doctor expressed it, Jews ". . . spoil everything they go into by turning it into a business."85

If, as this analysis implies, admission to medical schools is influenced by the desire to select candidates who will not become price cutters, then it ought to be possible to observe similar policies for postgraduate education. In particular, it should be possible to observe evidence of bias against Jews in surgical relative to non-surgical specialties. Consequently Jews ought to be under-represented in surgery relative to other fields of specialization. Converse results ought to hold for psychiatry. A study of physicians who were diplomates

84 J. W. Parkes, The Jewish Problem in the Modern World, (1946) recognizes the unique experiences of Jews in modern history and the impact of these experiences upon Jewish culture in his first chapter, "Why Is There a Jewish Question?"

85 Hall, "Informal Organization of the Medical Profession," 12 Canadian Journal of Economics and Political Science 38 (1946). This article suggests that young doctors `buy' positions on hospital staffs by providing free medical care in hospital clinics. The older members of the profession have an interest in maintaining this method of admission to hospital staffs because it helps maintain the acceptability of price discrimination with the public.

Similarly there exist controls over the maximum fees charged, price ceilings in effect, in order to minimize the possibility of fees that the public will regard as outrageous and thereby endanger the existence of structured prices. This function is performed by county medical society review committees that deal with the complaints of excessive fees. For an example of the functioning of such a committee, consult Phillips, "Doctor Cancels $1,500 Bill for Hoopers at Medical Group's Urging," N. Y. Times, p. 1, col. 2, (June 23, 1957). For a reflection of public attitudes in this case, consult 70 Time 34 (July 1, 1957). A. Ruppin suggests that Jews developed modern competitive attitudes in commerce before the industrial revolution as a result of their exclusion from medieval guilds, in an effort to survive commercially in this hostile environment. With the onset of the industrial revolution and the weakening of trade barriers, the relative economic position of Jews improved. Jews in the Modern World, p. 110 (1934). 31

in various specialties was made for the year 1946 for Jews and non-Jews for the cities of Brooklyn, Newark, Buffalo, and Hartford-Bridgeport. It was found that thirty-two per cent of the surgeons in Brooklyn were Jews, twenty-five percent in Newark, eight in Buffalo, and six in Hartford. Of the ten specialties considered for Brooklyn, the representation of Jews among the surgeons was lowest. For the other three cities, eleven specialties were considered. For all three of these cities, the representation of Jews among specialists was also lowest in surgery (453 Jewish specialists were considered in Brooklyn, the other three cities added 122). On the other hand, for the category neurology-psychiatry, the representation of Jews among the specialists practicing in this field ranked third for Brooklyn. For the other three cities, the rankings were one tie for fourth place, one first place and one fourth place.86

The distinction between psychiatry and surgery is a special case of the general distinction between surgical and non-surgical specialties. Hospital connections are far more important for the practice of surgical than non-surgical specialties. Therefore controls over the members of the medical profession in surgical specialties are stronger. If. as it has been argued, price discrimination is stronger in the surgical specialties, then there should be a significant difference in the frequency of Jews in surgical and non-surgical specialties. Two independent studies provide evidence that is consistent with this implication. For the state of Pennsylvania, one observer found that the frequency of Jews in non-surgical specialties was forty-one percent larger than in surgical specialties. The probability of a sample of this size, 1,175, of which 190 were Jews, being a random sample of a population characterized by an absence of a difference in the frequency of Jews in the surgical and non-surgical specialties is less than one half of one percents' For Brooklyn the frequency of Jews in the non-surgical specialties was thirty percent greater than for the surgical specialties. This difference could occur by chance with a probability of less than one percent if this were a random sample of a population that failed to exhibit this property. Similar results hold for a combination of the other three cities. The hypothesis that there exists a difference between surgical and non-surgical specialties with respect to the admission of

86 Consult Shapiro, op. cit. supra note 82, at p. 125, table IV.

87 Weinberg, Jewish Diplomates in Pennsylvania, 4 Medical Leaves 159 (1942). The non-surgical specialties were dermatology and syphilology, pediatrics, psychiatry and neurology, internal medicine, radiology, pathology; the surgical specialties were orthopedic surgery, ophpthalmology, otolaryngology, obstetrics and gynecology, surgery, and anesthesiology.

88 Shapiro, op. cit. supra note 82, at p. 125. One entry for all ophthalmologists in Brooklyn is missing and another entry for all radiologists in Hartford was obviously in error. Therefore Hartford radiologists and Brooklyn ophthalmologists, both Jewish and non-Jewish, were not represented in the foregoing calculations. Personal communication with the author of this article failed to elicit a clarifying response.

Jews is consistent with the qualitative observation found in another report. This source observes that "fair play" exists in the admission of Jews to non-Jewish hospitals for training in the non-surgical specialties but not for training in the surgical specialties.89 Apparently the Jews who do get into medical schools are "dumped" in the non-surgical specialties.90

Another piece of evidence consistent with the price cutting explanation of the discrimination against Jews in medicine is the drop in admissions of Jews to medical schools between 1933 and 1938. During that time, there was a decrease in over-all admissions to medical schools of about five percent and a decrease in admission of Jewish students of about thirty percent.91 Between 1928 and 1933, the prices of medical services dropped sharply and the real income of doctors as a group decreased. The depression produced a reduction in the size of the pie available to the profession. This smaller pie was contended for quite vigorously by the existing members. The Jews as price cutters were probably relatively successful, and in the process the structure of discriminatory prices was jeopardized. As a result, the threat of Jews to the aggregate income of the profession was brought home in a very forceful way at this time. Therefore the sharp curtailment in admission of Jews to medical schools resulted in an effort to reduce the vulnerability of structured prices to destruction by competitive behavior.92

The evidence used to support the proposition that discrimination against certain minority groups results from the desire to maintain price discrimination

89 "Facilities of Jewish Hospitals for Specialized Training," 3 Jewish Social Studies 375, 378 (1941).

90 These data are also consistent with at least two other hypotheses worth considering. One is that Jews simply lack the physical dexterity required for success in surgery. This seems to be inconsistent with the frequency of Jews in such fields as dentistry. Levinger, "Jews in the Professions in Ohio," 2 Jewish Social Studies 401, 430, table XXXIII (1940) . The other is that there exists no more discrimination against Jews in surgical specialties than non-surgical specialties but that there does exist at least an additional barrier that must be surmounted in order to get into the surgical specialties that is absent for the non-surgical specialties. No evidence of the existence of such a barrier has been detected.

91 Goldberg, op. cit. supra note 82, at p. 332. Another distinguished member of the medical profession who has encountered the disapproval of his colleagues for unorthodox views, recognized the economic motivation for this policy and properly describes it as a trade union tactic. He also recognized the conflict of interest position of organized medicine resulting from its control over admissions to the profession. Cabot, op. cit. supra note 7, at p. 263.

92 A decrease in the frequency of Jews among medical students could occur for reasons other than an increase in the intensity of discrimination. However only an increase in the intensity of discrimination would (1) increase the frequency of Jews in schools of osteopathy, and (2) increase the frequency of Jews among all Americans studying abroad. Between 1935 and 1946, the frequency of Jews in schools of osteopathy more than doubled (9.1 to 20.3%). A Report of the President's Commission on Higher Education, pt. II, pp. 38 ff. (1947). This report imputes to the blocking of opportunities in medicine the rise in the frequency of Jews in osteopathic schools. The President's Commission concluded that a substantial part of the responsibility for the discriminatory practices of medical schools belongs to professional associations.

is also consistent with the implications of simple monopoly theory. It medicine is a monopoly, then it follows that the number of candidates that would like to win entry into the medical profession exceeds the number that in fact are permitted to enter. Therefore unless the number of openings in the profession are sold or auctioned off, a practice that has not been unknown in the American labor movement, non-price rationing is inevitable. This leaves those who have the job of rationing available openings the opportunity to indulge in their tastes for the kind of people that they would like to see in the profession without any effective constraints in the form of costs or positions that must be filled. Under these circumstances, as contrasted with the free entry characteristic of competitive markets, nepotism, discrimination against unpopular cultural groups such as Jews and Negroes, and discrimination against those who hold unpopular ideas such as communists, thrives."93 Therefore discrimination against Jews and others in admission to medical schools can be rationalized as a manifestation of non-price rationing. Since the surgical specialties are presumed to have more monopoly power than the non-surgical specialties, there is more non-price rationing in the former and as a result, more discrimination.94 The increase in the tempo of discrimination in the thirties can also be rationalized as a consequence of an increase in the extent of non-price rationing. The demand for medical services is probably highly income elastic and as a result of the depression and admission policies geared to a demand schedule for medical services that existed in the twenties, the monopoly returns in medicine declined during the early depression years. Therefore admissions were subsequently curtailed in order to redress the effects of too liberal admission policies in the past. Consequently the extent of non-price rationing increased.


If different prices for the same service exist, then economic theory implies that there must also exist some means for enjoining producers of this service from acting in their own self interest and thereby establishing uniform prices. Observable phenomena abundantly support this implication. Available evidence suggests that the primary control instrument of organized medicine is the ability to cut off potential price cutters from the use of resources complementary to doctors' services for producinet many classes of medical care. However,

93 On theoretical grounds, there is a sound basis for the belief that generally speaking, the A.F.L. craft unions have more monopoly power than the C.I.O. industrial unions. Wright, op. cit. supra note 1, pp. 207 ff. Observers of discrimination in the American labor movement find that Negroes are discriminated against more frequently by A.F.L unions than by C.I.O. unions. H. E. Northrop Organized Labor and the Negro, ch. 1. (194-I).

94 If it were found that the surgical specialties had no more monopoly power than the non-surgical specialties, this would be evidence against the simple monopoly hypothesis; but would be consistent with the discriminatory mononoly hypothesis.

techniques other than the withdrawal of staff privileges in hospitals are also employed to maintain discipline in the medical profession. These include no-criticism rules, professional courtesy or the free treatment by doctors of other doctors and their families, prohibition of advertising that might reallocate market shares among producers, preventing doctors from testifying against one another in malpractice suits, and the selection of candidates for medical schools and post graduate training in the surgical specialties that have a relatively low probability of being price cutters. All of these sanctions can be rationalized as means for maintaining price discrimination. Therefore the use of these sanctions is consistent with the hypothesis that the medical profession constitutes a discriminating monopoly.

If being cut off from the use of a complementary agent of production, hospital services, is the chief means of disciplining the existing members of the medical profession, then there ought to be a difference in the price discipline maintained in the surgical and non-surgical specialties. Consequently there ought to be a significant difference between the surgical and the non-surgical specialties in the frequency of discriminatory pricing. There are no grounds for believing that there is any difference between the surgical and non-surgical specialties with respect to the effectiveness of the more subtle means of control. Therefore as a result of the relatively weaker impact on the non-surgical specialties of the loss of hospital staff privileges, it should be possible to observe that the non-surgical specialties have not only more price cutters in their midst but also are relatively freer in criticizing other members of the profession, serving as expert witnesses, and violating professional courtesy. Similarly this analysis implies that before the turn of the century, price discrimination in medicine was less pervasive, doctors criticized each other more freely, were more willing to act as expert witnesses against one another, did not as readily provide free medical care to other members of the profession, and did not discriminate against potential price cutters in admission to medical training.95

The economic interest of the medical profession in maintaining price discrimination has led to opposition directed against new techniques for marketing medical services that offer promise of utilizing the existing stock of physicians more efficiently than heretofore. Consequently the opposition by organized

95 Fee splitting, according to the hypothesis presented in this paper, should have been more prevalent at this time. Splitting fees makes for freer entry into the surgical care market. Newcomers can offer large rebates to referring physicians and thereby win patients away from established surgeons. There seems to be evidence that fee splitting was prevalent in medicine around the turn of the century and it was indeed employed by newcomers as a means for winning entry into the surgical care market. Rongy, "Half a Century of Jewish Medical Activities in New York City," 1 Medical Leaves 151, 15S (1937). This implies that the older, more established surgeons oppose fee splitting. This is consistent with the evidence. Williams, "A. C. S. Closes In On Fee Splitters," 31 Medical Economics 161 (1954).

Berger, op. cit. supra note 17, at p 141 contends that surgeons object to fee splitting for economic reasons.

medicine to prepaid service type medical plans probably has resulted in higher economic costs of medical care for the community than would otherwise have been the case. Similarly the incompatibility of the indemnity principle of insurance and the "what the traffic will bear" principle of pricing medical services has inhibited the development of major, medical catastrophe insurance in this country and consequently has limited the ability of individuals to insure themselves against these risks. Insofar as freer criticism by the members of the medical profession of one another before the public is of value to consumers in helping them distinguish between better and poorer practitioners and in raising standards within the profession, the public has obtained a lower quality of medical service than would otherwise have been obtainable at existing costs. And insofar as being a potential price cutter weeds out candidates from medical schools and post graduate training in the surgical specialties who were better potential doctors than those accepted, then the quality of the medical services that could have been achieved at existing costs was reduced.

Economic theory implies that prepaid medical service plans imperil the existence of price discrimination. Consequently theory also implies that in geographical areas where such plans exist, price discrimination ought to be relatively less prevalent. In California, the Kaiser Plan has captured a substantial fraction of the medical care market and is the largest single producer in the state. In an effort to meet this competition, service-type plans have been offered by orthodox members of the medical profession that are non-discriminatory with respect to income. Competition has had the effect of reducing the extent of discriminatory pricing in the area. This has been true in a number of counties in California where the Kaiser Plan is particularly strong.96 Therefore both economic theory and empirical evidence suggest that if there were more competition among doctors in the sale of medical services, i.e., if doctors were individually freer to pursue their self-interest, there would be less discrimination in the pricing of medical services.

96 Oakley, "They Met the Challenge of Panel Medicine," 32 Medical Economics 122 (Feb 1955) ; Olds, "Usual Fee Plan Put to Test," 31 Medical Economics 131, but especially p. 20C (July, 1954) ; Andrews, "How They're Fighting the Kaiser Plan," 31 Medical Economics, 126 (Sept. 1954).

The End