"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. -------------------------------------------------- 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. [] ---------------------------------------------------------