By John C. Goodman
Originally posted at Forbes, September 2017
From the middle of the 19th century until the 1970s, about every serious health reform in the United States was due to the efforts of organized medicine. The American Medical Association, along with state and county medical societies, had a single, focused objective: replace a relatively free market for medical care with a cartel, fully protected by government regulation in every market that affected the economic wellbeing of doctors.
Whatever you think of their goals, you have to admire their methods. As I showed in Regulation of Medical Care: Is the Price Too High?, organized medicine understood economics and they used rational economic thinking in pursuit of all their political goals.
But for the past half century, a new group of reformers has come on the scene, with the alleged goal of improving the wellbeing of society as a whole. As health policy expert Greg Scandlen explains in his new book, Myth Busters: Why Health Reform Always Goes Awry, these reformers either did not understand economics or they believed that economic principles had nothing to do with medicine. As a result, their reforms almost always produced unintended and unwanted consequences — Obamacare being the most recent example.
Between unadulterated self-interest and muddleheaded altruism, it’s hard to say which group of reformers was worse.
Let’s begin at the beginning. By the early 20th century, organized medicine had succeeded in passing medical licensing laws in virtually every state. These laws defined who could practice medicine and who could not. For the most part, nurses, physician’s assistants and paramedical personnel could not provide any medical services unless they were employees of doctors or worked under their supervision.
Then, they adopted strict rules limiting the ability of doctors to compete. Physicians who advertised, posted prices, criticized other physicians or competed too aggressively in other ways could lose their hospital privileges and even their license to practice. Local medical societies and state licensing boards were far more aggressive in limiting competition than they were in rooting out bad doctors.
By the second decade of the 20th century, organized medicine succeeded in controlling entry into the profession by outlawing for-profit medical schools and gaining control of admission to the non-profits. By mid-century, they almost succeeded in driving for-profit companies out of the hospital marketplace. The boards of non-profits were dominated by doctors and people who tended to see eye-to-eye with local medical societies.
With the hospitals firmly under control, health insurance was next. Blue Cross was created by the hospitals and Blue Shield was created by the doctors. Once these organizations got special favors from state governments, they came to dominate the insurance marketplace. If a for-profit insurer refused to pay hospitals in the provider-friendly ways the Blues paid, hospitals could refuse to deal with the insurgent altogether.
So, for a while, the entire medical marketplace was controlled by and did the bidding of organized medicine. It was the most successful professional cartel ever seen in this country or anywhere else for that matter. Of course, most doctors had nothing to do with any of this. They were just practicing medicine.
In the mid-1970s, things began to change. In a court settlement with the Federal Trade Commission, the AMA agreed to give up its ability to punish doctors who compete aggressively. The for-profits made a comeback both in the hospital and health insurance sectors. Instead of doctors controlling hospitals and insurance companies, these institutions increasingly became the doctors’ employers. Nurses and paramedics gained new found freedoms in state after state.
So, did we get a return to the free market, after 100 years of suppression? Hardly. The second wave of reformers sought not to repeal the mistakes of the past. They sought instead to pile new regulations on top of old ones. All this is ably described in Greg Scandlen’s new book.
Behind every wrong turn in health policy, writes Scandlen, is a myth that has misled the reformers. The book is a rich smorgasbord of myth puncturing, thoroughly delightful as long as you like bad thinking sliced and diced and disposed of forthwith. Scandlen’s entertaining writing style makes the experience even more enjoyable.
Have you ever wondered why we have been granting generous tax relief to people who get health insurance at work for the last 70 years, while not giving similar tax relief to people who buy insurance on their own? There’s a myth behind that policy. It’s the idea that employers “pool risks” and take advantage of the law of large numbers, while people on their own suffer from non-pooling. So, the argument is: we should encourage the former and not the latter.
Yet Scandlen shows that the minimum number of people needed for a viable pool is 25,000 and the optimal number is 60,000. So, a small employer with, say, 75 employees is actually concentrating risk, not spreading it. If those employees were buying individual insurance they would be in much larger pools.
There are other myths about individual insurance, including the idea that (prior to Obamacare) insurers refused to cover large numbers of people with pre-existing conditions and the claim that individual insurance has higher administrative costs. Scandlen says that the number of people who were denied coverage in the bad old days was less than one tenth of 1% of the entire population. As for administrative costs, a Milliman study finds that they are roughly similar for individual and small-group insurance.
Then there is the “free rider” myth. That’s the idea that if we don’t have a health insurance mandate people will choose to be uninsured and take advantage of the “free care” hospitals provide. Scandlen shows that the cost of such “uncompensated care” is 3% of total health care costs. That’s less than the cost of shoplifting and employee theft.
And don’t overlook the electronic medical records myth. Apparently, EMRs raise costs and lower quality, rather than the other way around. The British National Health Service spent $12 billion on an EMR system before junking it altogether. The RAND Corporation, which predicted that EMRs would save the US government billions of dollars, now admits they are costing the government money instead.
The worst thing about health policy myths is not that they lead to bad policies. It’s that in order to correct the problems of the bad policies, reformers enact more bad polices rather than understanding the fallacy of the original myth. So, myths lead to bad policies, which lead to more myths and more bad policies — in a cascade of public policy disasters.
Take Roemer’s Law: A bed built is a bed filled. Supply creates its own demand. Given the opportunity, greedy doctors and greedy hospital administrators will spend health care dollars with abandon – regardless of the real need.
Roemer’s Law was the justification for certificate of need laws – limiting the ability of competitors to enter the hospital marketplace. But in the absence of competitors, hospitals were free to charge more to their customers. That led to hospital rate regulation, further constraining the ability of market forces to solve problems.
As it turns out, Roemer’s law is wrong. Yes, the market has been suppressed – year after year; decade after decade. Even so, empty beds don’t always get filled. From 1970 to 2000, hospital occupancy rates fell from 77% to 67%, according to the National Center for Health Statistics. In other words, one-third of beds at the turn of the century were not filled.
Corresponding to the idea that hospitals can create their own demand is the idea that doctors can do the same. This is a myth supported by researchers at Dartmouth. It led to the idea of medical practice guidelines, or what some derisively call “cookbook medicine.”
The original Dartmouth study was by Jack Wennberg, who found wide differences in hysterectomy rates in two towns in Maine. Wennberg concluded that the difference was due to the doctors, but Scandlen argues that the more likely explanation is differences in the patients.
Nonetheless, the Dartmouth myth is the whole idea behind Obamacare’s failed experiment with Accountable Care Organizations (ACOs). Yet, even though the ACO idea originated there, Dartmouth recently backed out of the whole program.
Scandlen’s book is a must read. Especially for policymakers who have the power to perpetuate continuing harm.