How the US Government Created the Healthcare Cost Inflation We Have Today

Burns on Health Care

An economic history of the American health care system-Part 1

From the pre-Flexner era to the great depression

Michel Accad, 5/29/2016

Q: What is the starting point in the history of the American health care system?

A:  The American health care system was born in the 1910’s out of the so-called “Flexnerian reform” in medical education and the resulting licensing laws.

Q: Why is that the starting point?

A: Prior to that time, medical care in the United States was essentially unregulated.  Anyone could open up a medical practice, and many did so with little training.

Patients had complete freedom to obtain medical care from whomever they wished.  When such complete freedom exists, one cannot realistically talk about a “system.”

Q: What were the main features of this “pre-historical” period?

A: There were competing forms of medical care.  “Regular” medicine continued the tradition emanating from European institutions and medical schools.  It was ostensibly represented by the American Medical Association (AMA).

The regular form of medical care tended to be more disposed toward aggressive interventions (blistering, bloodtletting , and toxic purgatives), but over time, it also increasingly incorporated scientific knowledge into its mode of practice.   Surgery was part of regular medicine, and surgical techniques were improving rapidly in the latter part of the nineteenth century.

Other forms of medical care, such as Eclecticism, herbalism, and homeopathy tended to be less inclined toward aggressive treatments, and each had its own diagnostic and therapeutic philosophy.

There was a multitude of medical schools, and most of them were privately owned.  In many cases, the curriculum lasted one or two years after high school.  Given this large number of schools, the United States had the highest number of physicians per capita in the world.

Q: It seems like a very chaotic situation.  Were patients confused?

A: It is hard to objectively gauge how the population felt about its medical care at the time, but we can document that over the last decades of the nineteenth century, people seemed to favor medical care which embraced scientific discoveries such as the germ theory of disease.

The number of proprietary schools  declined, and those that survived did so by improving their standards.  Hospitals and institutions which offered more scientific care flourished.  An instructive example of how ordinary people were able to distinguish and reward high quality care is that of the early years of the Mayo clinic.

Q: Who was Flexner and what did he accomplish?

A: Abraham Flexner was an important figure in educational activism who was hired by the Carnegie Foundation to study the state of medical education in the United States.  He had previously issued a report critical of higher education in colleges and universities.

Flexner and leaders at the Carnegie Foundation were impressed with recent scientific and technological advances and wished to promote a philosophy of “scientific management” of human and social affairs, a philosophy that characterizes the progressive era.  At the behest of the AMA’s Council on Education, the Carnegie Foundation decided to fund a survey of medical education and hired Flexner for the task.

Flexner spent two years visiting medical schools throughout the continent and published his influential report on Medical Education in the United States and Canada in 1910.  After publication of the report, Flexner continued to be actively engaged in promoting the report’s recommendations.

Q: What did Flexner find and what did the Flexner report call for? 

A: The report is described as “muckraking” by Kenneth Ludmerer, a prominent historian of medical education.¹  Except for a few academic schools which he praised, Flexner condemned the state of medical education in no uncertain terms.

The report called for the closure of all medical schools which did not demonstrate a commitment to scientific standards and did not incorporate a laboratory practice.  It also called for licensing laws to require higher educational standards. The report was consonant with the goals of the AMA, established in 1847 ostensibly to strengthen medical education and to reduce the number of physicians.  In fact, Flexner collaborated closely with members of the AMA, and the organization provided him with findings of a survey it had previously conducted and on which he relied to write his own, allegedly independent, report.

Q: What effect did the report have?

A: The Flexner report is frequently credited for setting into motion medical education reform, but this is erroneous.  Great improvements in education had already occurred in many academic institutions in the previous two decades, and the innovations and higher standards were spreading across the country prior to the report.

The main effect of the report was to change public and political opinion about medical education and to influence the implementation of strict licensing laws.  The change in sentiment was facilitated by the political and financial influence of organizations such as the Carnegie Corporation and the Rockefeller Foundation.

In the wake of the report, and under the lobbying efforts of the AMA, states rapidly established medical acts to regulate the issuance of medical licenses.  Henceforth, licenses would only be given to graduates of schools that met criteria set forth by the Flexner report.  Those medical schools would have to be accredited by the Liaison Committee on Medical Education, a joint venture of the AMA and its close ally, the American Association of Medical Colleges.

Q: What happened next?

A: From an economic standpoint, what happened next was a period of severe medical price inflation which occurred quickly and dramatically.  The situation was so serious that in 1925, a national Committee on the Costs of Medical Care (CCMC) was organized to address the question.

The CCMC was also funded by the Carnegie Corporation and by a number of other private foundations, such as the Rockefeller Foundation.  The committee received material assistance from the AMA, the American Hospital Association, and other leading professional organizations, as well as from many government agencies, including the National Bureau of Economic Research.  Numerous reports were issued over the next few years, and those were compiled in 1932 into a large volume entitled The Costs of Medical Care.

Read More: How Government Healthcare Interference Got Started in the U.S. and What It Will Lead To

Health Care

One of Ludwig von Mises’s keenest insights was on the cumulative tendency of government intervention. The government, in its wisdom, perceives a problem (and Lord knows, there are always problems!). The government then intervenes to “solve” that problem. But lo and behold! instead of solving the initial problem, the intervention creates two or three further problems, which the government feels it must intervene to heal, and so on toward socialism.

No industry provides a more dramatic illustration of this malignant process than medical care. We stand at the seemingly inexorable brink of fully socialized medicine, or what is euphemistically called “national health insurance.” Physician and hospital prices are high and are always rising rapidly, far beyond general inflation. As a result, the medically uninsured can scarcely pay at all, so that those who are not certifiable claimants for charity or Medicaid are bereft. Hence, the call for national health insurance.

But why are rates high and increasing rapidly? The answer is the very existence of healthcare insurance, which was established or subsidized or promoted by the government to help ease the previous burden of medical care. Medicare, Blue Cross, etc., are also very peculiar forms of “insurance.”

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