Medical Costs and the Impact of the
Subsidization of a Cartelized Industry
The rise in the cost of medical care is said to be out of control and somewhat of a mystery. However there is really no mystery involved. It is is due to the subsidization of an industry which there is effectively a cartel operating to restrict the supply of medical practitioners.
Around 1900 there was a concerted effort on the part of physicians in the U.S. to restrict the supply of doctors; as they termed it, "To practice professional birth control." First campaigns were conducted in every state to require doctors to pass an examination in order to practice medicine in that state. That was easy for everyone to accept as reasonable. However it is one thing for the government to create a program of certification and yet another thing to create licensing. Certification provides consumers with information whereas licensing is always a vehicle for restricting supply. In the case of physicians it was then specified that in order to take the examination a candidate had to be a graduate of an accredited medical school. Somehow that deviated from the goal of requiring competency for medical practioners. But most would accept that as probably basically wise. Then came the clencher. Who was to be the accrediting agency for the the medical schools. The task was given to a committee of the American Medical Association (AMA). The AMA is basically the union for doctors, or perhaps more accurately the guild for the doctors.
Representatives of the state AMA committees with the power to lift the accreditation of medical schools went around to those medical schools telling them that it did not think they could not do an adequate job of training the number of doctors they were training and that half that number was more suitable. The medical schools had no choice. The lifting of their accreditation would eliminate all demand for their services.
So the admissions to medical schools in the U.S. was reduced about fifty percent. There was now a quota. There were thousands and thousands of Americans with the abilities and the motivation to become doctors who were denied the opportunity simply because of this quota. In Canada while more than 50 percent of the medical schools were eliminated and the enrollment cut also by more than 50 percent there was no elimination of medical schools. This suggests that what was happening to medical education was not entirely or even mostly about improving the quality of medical education.
As a result of this restriction the income of doctors went up. In the long run the benefits of the restricted supply of doctors did not all accrue to doctors. The restriction generated economic rents which others found ways to garner. The medical schools, with their quotas on admission, could charge higher tuitions. Consequently now many doctors graduate from medical school with enormous debts for their educations. So now it appears that doctors need to receive high incomes to pay for their expensive education.
In terms of economic analysis, what was involved was the creation of a cartel of doctors. A cartel functions as a protected monopoly. If a monopoly is created in an industry that was previously competitive, the first thing the monopolist does is raise the price and reduce production.
In the long run the benefits of the restricted supply of doctors did not all accrue to doctors. The restriction generated economic rents which others found ways to garner. The medical schools, with their quotas on admission, could charge higher tuitions. Consequently now many doctors graduate from medical school with enormous debts for their educations. So now it appears that doctors need to receive high incomes to pay for their expensive education.
Dr. Morris Fishbein (1889-1976) originally studied to be a clown. Realizing he could make more money as a doctor, he entered medical school (where he failed anatomy), then barely graduated. He never treated a patient in his life.
Why is he so important? Because he became head of the AMA, a position that he used to enrich himself and crush legitimate therapies out of existence. He appeared to be motivated solely by money and power.
As head of the AMA (and editor of the Journal of the American Medical Association from 1924-1949), he decided which drugs could be sold to the public based only how much advertising money he could extort from drug manufacturers, whom he required to place expensive ads in the JAMA. There were no drug-testing agencies, only Fishbein. It was irrelevant if the drugs worked.
Fishbein was a shakedown artist. Yet, today, there is a Morris Fishbein Center for the History of Science and Medicine at the University of Chicago.
The AMA, a State-backed guild which today has a near-stranglehold on the medical profession, was founded in 1847 merely as a social and scientific organization. Its original purpose was totally appropriate. It was in their private (and the public's) interest for practitioners to get together to trade knowledge, and, for all the outward seriousness of the organization, to have some fun. The original purpose always seems to get lost, though. Some members always want to use the State to reduce the supply of practitioners (which increases income) and eliminate competition (which also increases income, and, much more seriously, reduces innovation). This happened with he AMA, which is why it is now a danger to the health of the American people.
In 1900, while attending the annual AMA convention in St. Paul, Minnesota, three doctors came up with the always-destructive but all-too-human idea of using the AMA as a front, in order to form a closed corporation for their financial benefit. A constitution, bylaws and a charter were created which appeared to give the members of the AMA a say in the activities of the corporation, whereas in reality the three directors had complete control. These three formed smaller political machines in every state, which they controlled through the main corporation.
In 1924, not surprisingly (perhaps inevitably) one of the directors became involved in a scandal and had to resign. He appointed Fishbein to take his place. Fishbein ultimately took control of the AMA, and by 1934 owned all of the stock. In his new position he was able to assume dictatorial control of the state licensing boards and made it as difficult as he could for any doctor who did not join. He, and the three doctors who formed the corporation, were little more than extortionists, ones who made millions by using the power of the State.
The AMA, which started out as a legitimate organization, rapidly became crooked. And Fishbein was the main cause.