San José State University
Department of Economics

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Meaningful Healthcare Reform in the U.S.
Would Start With Training Twice as Many Physicians

The problems with healthcare in the United States stem from its horrendously high costs. Those high costs are a direct result of artifical restrictions on the training of physicians and other healthcare professionals.

Here are the statistics on the ratio of practicing physicians to the overall population in the OECD countries:

The Number of Practicing
Physicians per 1000 Population
for the OECD countries,
2005
CountryPracticing
Physicians
per 1000 pop
Greece 4.9
Belgium 4.0
Italy 3.8
Spain 3.8
Switzerland 3.8
Iceland 3.8
Netherlands 3.7
Norway 3.7
Czechia 3.6
Denmark 3.6
Austria 3.5
France 3.4
Germany 3.4
Portugal 3.4
Sweden 3.4
Slovakia 3.1
Hungary 3.0
Ireland 2.8
Australia 2.7
Luxembourg 2.5
Finland 2.4
United Kingdom 2.4
United States 2.4
Canada 2.2
New Zealand 2.2
Poland 2.1
Japan 2.0
Mexico 1.8
South Korea1.6
Turkey1.5
Source: OECD Health Policy Studies

For some countries, such as Turkey, the low figures stem from the problems of financing and staffing medical schools. That is not the case for the United States. The economist Reuben Kessel tells the story of how this restriction was created. In this excerpt from his article, "Price Discrimination in Medicine," Journal of Law and Economics 1958, the footnotes are given in green at the end of the excerpt between horizontal lines. The full article is available at Kessel.

[In the 19th century] Medicine, like the profession of economics today, was until the founding of the American Medical Association (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 degree of M.D. should be adopted by all medical schools in the United States.

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 1898 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

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 82 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

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

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


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, 6672 (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 speech delivered at Medical Center, UCLA, to be published by the University of California Presss as one of 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.

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).

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.


A cartel is a price-fixing and market-sharing arrangement among a group of suppliers. If the cartel encompasses all of the suppliers in a market it functions like a monopolist. A monopolist makes excess profits by restricting the supply of a commodity and thus raises the price. The medical profession began to function as cartel once the A.M.A. got control of the acreditiation of medical schools and thus could control the number doctors who would be practising medical care.

It was strange that the creators of the medical cartel could get away with the the illogical argument that the country needed fewer but better trained doctors. Better trained yes but why fewer?

Reuben Kessel documents how the AMA enforced the cartelization of American medicine by systematically punishing any doctors who deviated from the program. It also persecuted group health programs by punishing doctors who participated in them.

In earlier days doctors charged different prices to different income groups. This was presented as a system in which the poor were charged a lower price because the rich were charged a higher price. Kessel demonstrated that this was not altruism but the behavior of monopoly getting as much profit from each income group as possible. The cartel was charging as much as each group could bear. Even for the services which were given free the doctors got the benefit of the practice that enabled them to charge a higher price to their wealthier patience. For example, doctors who wanted to specialize in cataract operations would go to India and perform thousands of operations for free in order to perfect their skills before practicing in America.

The end result of the cartelization of American medical care is shown in the following graphs.

The higher cost of healthcare in the United States is due not only to the artificial restrictions on the training of medical personnel; it also comes from the attempt to reduce the cost to patients by public subsidization. The subsidization of a good or service generally results in a higher market price at the same time it reduces the net price to the consumer. In effect the producers and consumers share the benefit of the subsidy. In the case of a monopoly the monopolist get about half of the benefit of the subsidy. Thus a major share of the subsidy of medical costs goes toward the benefit of the cartel. Furthermore, those who do not get the subsidy pay a higher price as a result of the subsidy to others.

Monopolies raise prices to the point where the effect on the quantity sold offsets the the benefit of a higher price. The quantity sold could be reduced by the typical buyer reducing the quantity purchased or for some buyers to be priced out of the market. Any program that keeps higher prices from affecting the quantity demanded simply results in the monopoly being able to charge a higher price. For more on this point see Monopoly Pricing.

Insurance also contributes to the higher demand for medical services and consequently higher prices because it makes the costs of services appear to be lower than they actually are. The effect is analogous to a group of people at a restaurant agreeing to share the restaurant bill equally. For a group of n people then the price of a dish to an individual is effectively 1/n of the actually price. The members of the group may thus order more expensive items than they would if they were paying individually. For more on this point see Group Demand.

Consider the effect of increasing the quantity of medical services demanded at the the current price. With a fixed supply of medical practioners in the short run the only effect is a higher price for medical services. The same quantity of services are provided only at a higher price. There is no great excess supply of medical services at the current prices. Thus the effect is to transfer medical care from some consumers to others.

The situation might be even worse. As the economist Martin Feldstein pointed out years ago the supply of physicians services may be backward-bending, meaning at a higher price for their services some doctors decide to work less and take the benefits of the higher price in terms of leisure time. If that is the case things become perverse; a subsidy of medical services ends up raising the price to the consumer instead of lowering it. See Impact of taxes and subsidies. In the long run in a competitive market there would be an increase in the quantity of physicians. However, the AMA through its control over admissions to medical school ensures that there will not be an adequate increase in the supply of physicians in the long run.

Thus the creation of a medical cartel raised the price of healthcare in the United States to exorbitant levels and will elevate it even higher under the proposed reforms. Once the cartel was operating the attempt to reduce the effect of the high cartel prices through public subsidies and insurance made things even worse. The end result is the horrendously high cost of medical services for Americans. Furthermore, America, which should be exporting doctors, has been importing doctors for decades.

Conclusions

Nothing other than the removal of the artifical restrictions on the number of medical personnel trained will alleviate the situation. The so-called Healthcare Reform proposals that were debated by Congress in 2009 and are now being considered in 2010 will only feed the cartel. Even with public provision of medical care the limited supply of medical practitioners would, through simple competition, result in unnecessarily high cost of medical care. Any attempt to avoid this through the setting of the wages for physicians by government fiat would only result in shortages and prompt non-price methods of rationing medical care. Thus nothing will bring down the high cost of medical care and bring about a net increase in medical services except breaking the cartel's restrictive quotas on the number of physicians and other medical personnel trained.


For more on healthcare see Healthcare


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