"A Study of Physicians' Fees"
Council on Wage and Price Stability, Executive Office Of The President
March 1978
(submitted to the net by Mike Peercy- Nov. 1991)
_A Study of Physicians' Fees_, by the Council on Wage and Price
Stability, Executive Office of the President, was written in March,
1978. It is a report of why inflation of physicians' prices have
significantly (by 43%) outpaced inflation in other wages. It also
covers the fact that, since health insurance payments are not
included in the CPI, even this is an underestimate of how fast
medical prices have increased.
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The cost of physician care is increasing at a disturbing rate. Last
year alone, physician fees rose 9.3 percent--50 percent more than other
consumer prices. The 1977 increase followed a pattern that spans nearly
three decades. In fact, ever since 1950, physician fees have
consistently outpaced overall inflation except during the 1971-1974
period of wage and price controls. Over the entire 1950-1977 period,
physicians' fees increased 43 percent faster per year than non-medical
care prices.
All medical care services have long been a major source of
inflationary pressure in our economy. Sharply rising medical care
prices have contributed to a steady increase in the share of GNP
represented by health care outlays, going from 4.5 percent of GNP in
1950 to 9.3 percent today. [1991 note: that represents a 2.7%/year
increase. Carrying that through the 80's reveals, surprise, a 13.6%
GNP portion today. 13% is indeed the share today if I'm not mistaken.]
...
There are many factors responsible for the long-term trends of rapidly
increasing physicians' fees and expenditures for physicians' services.
These include: 1) rising consumer income; 2) anticompetitive practices
of organized medicine; 3) growth in the coverage and comprehensiveness
of health insurance; 4) implementation of government sponsored health
insurance programs for the poor and the aged; 5) changes to more
generous insurance approaches for physicians' services and 6) changes
in the physician specialty distributions. These factors operated to
improve the physician's position in the market for his services, or to
partially exempt physician fees from the constraints of a competitive
market....
There is considerable evidence that for much of this century organized
medicine has successfully restricted entry into the medical profession,
primarily through its control of state licensing processes and the
system of medical education. A study by Abraham Flexner, completed in
1910 under the aegis of the Carnegie Foundation and at the request of
the American Medical Association (AMA), fundamentally changed the system
of medical education in the United States. The implementation of the
Flexner report resulted in the closure of many substandard medical
schools and improved the quality of medical education. But, according
to Reuben Kessel, who studied the impact of the Flexner report on
medical education and the supply of physicians, its implementation also
placed organized medicine firmly in control of medical education and
entry into the profession. "Organized medicine--again the AMA--using
powers delegated by state governments, reduced the output of doctors by
making the graduates of some medical schools ineligible to be examined
for licensure and by reducing the output of schools that continued to
produce eligible graduates." [Kessel, "The AMA and the Supply of
Physicians", _Law and Contemporary Problems_, School of Law, Duke
University, Spring, 1970, p. 267] ... Between 1904 and 1915, the number
of medical students declined from 28,000 to 15,000, resulting in a
decline in the physician/population ratio. The number of physicians per
100,000 population declined from 146 in 1910 to 125 in 1929. In the
typical market, a decrease in supply, with other factors remaining
unchanged, generally results in higher prices charged for a product or
service. During periods of declining demand, such as the depression of
the 1930's, a reduction in supply could be expected to moderate falling
prices.
When the Council on Medical Education of the AMA initially forced
the closing of medical schools by denying them accreditation, a
prerequisite for licensing of their graduates in most states, the
motivating factor was to improve the quality of medical training.
During the 1930's, however, there is evidence that the AMA sought to
limit the supply of new physicians to prevent erosion of income levels
and reduce what they regarded as an excess supply. Writing in 1933,
Harold Rypins, then Secretary of the New York State Board of Medical
Examiners, noted that "without intention or design, the far reaching
steps taken by the physicians to raise educational standards during the
past 25 years has resulted in limiting the number of students. Now
realizing the advantages of this unplanned restriction, leaders...are
taking definite steps to cut down the professional class." [Quoted in
Milton Friedman and Simon Kuznets, _Income From Independent Professional
Practice_, National Bureau of Economic Research, 1945, p. 12] In late
1934 or early 1935, after veiled warnings of disaccreditation for
medical schools that increase class size, the Council on Medical
Education noted that "seven schools have definitely stated that their
enrollment will be decreased and others have indicated adherence to the
Council's principle." [Ibid., p. 13] In each year from 1935 to 1939,
the number of admissions to medical schools was less than the previous
year. [Ibid., p. 14]
The decline in medical school admissions during the 1935-1939 period
resulted in a small reduction in the supply of physicians relative to
the population during the 1950's, when demand for physicians' services
expanded rapidly. [By one measure it was from 135 per 100,000 to 133;
by another measure, 144 to 139.] ... The relative decline in the
physicians rendering patient care was somewhat greater, as a larger
proportion of physicians than previously entered careers in medical
research and medical education. This reduction in supply resulted in
greater demand per physician, higher physician's income and probably
greater fee inflation than would have been the case had medical school
enrollment been allowed to increase during the 1935-1940 period.
In 1942, the Liason Committee on Medical Education (LCME) was formed
jointly by the AMA's Council on Medical Education and the Association
of American Medical Colleges to handle medical school accreditation
matters. Throughout the mid-1950's, the AMA remained opposed to
significant expansion in the number of medical students and lobbied
against Federal programs designed to increase medical school enrollment,
at times splitting with its LCME medical partners who supported some of
the measures. [Elton Rayack, _Professional Power and American
Medicine_, World Publishing Co., Cleveland, 1967, pp. 90-94] The AMA
steadfastly argued, in statements by its presidents from 1952 through
1956 and in numerous editorials, that no physician shortage existed,
despite several studies that arrived at opposite conclusions. However,
after additional reports predicted severe future shortages of
physicians, the AMA, in 1959, acknowledged the need for educating more
physicians, but remained opposed to Federal support for medical
education. [Ibid., pp. 93-95] During the early 1960s, the AMA position
was further modified and they supported limited Federal support for
medical education.
Between 1945 and 1965, medical school enrollment expanded from
25,000 to 32,000, but did not keep pace with population growth. Since
1965, medical school enrollment has expanded rapidly, increasing from
32,000 to 56,000 in 1976. This expansion, along with the large number
of physicians immigrating to the United States, caused the number of
active physicians to increase from 289,000 in 1965 to 377,000 in 1975,
and the number of physicians per 100,000 persons to increase from 149 to
177. For reasons discussed below, this increase in supply did not
moderate physician fee inflation.
[I'll just glimpse over the reasons discussed for continued inflation in
physician service price:]
1) AMA direct opposition to competition.
Organized medicine has a well documented history of opposing
physician advertising, price competition among physicians and
alternatives to the fee-for-service system of medical care. [See,
for example, Elton Rayack, _Professional Power and American Medicine_,
pp. 135-201; Reuben A. Kessel, "Price Discrimination in Medicine,"
_Journal of Law and Economics_, October 1938 (sic, probably 1958)]
The AMA's efforts to limit competition among physicians are grounded
in its Principles of Medical Ethics. Referring to activities engaged
in by physicians in a medical practice group, but essentially
restating in concise form its view on individual physician behavior,
the AMA declares it unethical:
1. When the compensation received is inadequate, based on the
usual fees paid for the same kind of service and class of
people in the same community.
2. When the compensation is so low as to make it impossible for
competent service to be rendered.
3. When there is underbidding by physicians in order to secure
the contract.
4. When a reasonable degree of free choice of physicians is denied
those cared for in a community where other competent physicians
are readily available.
5. When there is solicitation of patients directly or indirectly.
[_Opinions and Reports of the Judicial Council Including the
Principles of Medical Ethics and Rules of the Judicial
Council_, the American Medical Association, Chicago, 1972,
pp. 30-31]
These ethical principles and their enforcement by local and state
medical societies were designed to prevent competition among physicians.
According to a complaint filed in December 1975 by the Federal Trade
Commission (FTC), the enforcement of these principles had the following
effects:
(a) Prices of physician services have been stabilized, fixed,
or otherwise interfered with;
(b) Competition between medical doctors in the provision of such
services has been hindered, restrained, foreclosed, and
frustrated; and
(c) Consumers have been deprived of information pertinent to
the selection of a physician and of the benefits of
competition.
[Complaint of the United States of America before the Federal Trade
Commission, against the American Medical Association, the
Connecticut Medical Society and the New Rahem County Medical
Association, Inc., Docket No. 9063, December 19, 1975]
It should be noted that physicians were not unique among
professions in seeking to discourage price competition. Until the
past decade, several of the professions discouraged price competition
among their members through codes of ethics and disciplinary action.
Until recently, their efforts were sanctioned by the courts which
ruled that the "learned professions" were not "commerce" and were
exempt from the anti-trust laws.
2) Opposition to prepaid group practice.
In addition, local and state medical societies lobbied for legislation
that effectively outlawed prepaid group medical practice. As of 1967,
26 states had laws that effectively prevented the operation of HMOs....
These state restrictions have since been eliminated through Federal
legislation.
3) Increasing insurance coverage, and
4) changes in insurance reimbursements.
Organized medicine's restrictions on the supply of physicians, on
advertising, on competition and on prepaid group medical practice likely
resulted in higher fees and higher physicians' income during the 1940's
and 1950's when demand for their services expanded rapidly. During this
period, competitive forces operating in the market for medical services
were far more important than they are today, due to the more limited
extent of health insurance. Since 1960, the supply of physicians has
been expanded significantly and the potential for competition increased.
During this period, however, there has been a rapid expansion in health
insurance coverage and changes in ways physicians are paid. This
constrains the impact of competition on physicians' fees.
Specifically cited are (a) the decrease in charity cases due to rise in
insured patients (it's estimated that the discount of salaries due to
charity was 28% in 1948), causing, of course, higher salaries, (b) change
from fee schedule reimbursements to "usual, customary and reasonable"
payments, sometimes set at the 90th percentile of the fees across the
community.
5) Improvement in quality of care and specialization.
Not included as a cause of fee inflation, but rather as an expense of
physicians is malpractice insurance and defensive medicine.
The sharp increase in malpractice insurance costs contributed to the
recent physician fee inflation, but cannot explain all or even most of
the more rapid inflation in fees than in all other consumer prices....
More significant that the impact of malpractice insurance costs on
physicians' fees is the increased incentive to use "defensive medicine."
Defensive medicine has been defined as "those actions which are taken by
health practitioners to protect themselves against medical malpractice
claims and to defend themselves in the event a malpractice claim is
instituted." [] In the early 1970s, one study estimates that the
radiology component of defensive medicine alone was one billion dollars
per year. [] A February 1977 AMA survey indicates that 76 percent of
all physicians are ordering extra tests and procedures as protection
against malpractice claims. [] While some defensive medicine is
desirable and results in improved medical care, much of it is clearly
wasteful. Putting a national price tag on the unnecessary defensive
medicine is speculative, but the true figure including excess radiology,
excess pathology and unnecessary hospital stays, may exceed three
billion dollars. []
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