Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Letter to Catherine S. Smith: The Medical Marketplace, Incentives vs. Controls

Catherine S. Smith

Vice President, Development and Public Affairs

224 Second Street SE

Washington DC 20003

Dear Ms. Smith,

Re: The Medical Marketplace: Incentives vs. Controls

I was flattered by your recent request, thrilled with the prospect of a Cato book on the subject, and yet dismayed to discover a hostile undertone to the AMA in the outline. Perhaps I can do something to head off an unfortunate confusion in the minds of the authors as to who are their friends and who are their enemies.

Let me identify myself. I Am a member of the House of Delegates of the AMA, Chairman of the Philadelphia Delegation, and a candidate for election to the AMA Council on Medical Service. I doubt very much if anyone else at the AMA currently has more influence over the thought processes of the present-day AMA about the particular subject material of the forthcoming book. At the same time, I am a loyal subscriber, contributor, member or whatnot of the Cato Institute; I read its publications eagerly, attend its meetings when I can, and endorse its philosophy as completely as anyone could without losing his self-respect.

Furthermore, I labor under the impression that the concept of the IRA for Health was suggested by John McClaughry in anticipation of a dinner for the White House staff, was fleshed out into its present form by me after that dinner speech which Bill Niskanen attended. Quite possibly others thought of it independently or even earlier, it doesn't really matter. It is more important to understand that the AMA has embraced the concept as an official policy has spent a lot of money on actuarial work, and is trying its best to get the idea promoted in Congress. The Cato and the AMA would make a great team to put the idea over the goal line. At the same time, I know how touchy the AMA is about criticism, and I hope you can do something to prevent a collision between what ought to be two firm allies.

I am referring in particular to what I fear is behind the reference to the AMA as a quasi-monopoly, attributing to it the creation of cost-plus reimbursement. If I understand this allusion correctly, the authors are unaware of the considerable effort and expenditure of the AMA to get rid of hospital cost-reimbursement in 1983, and its violent efforts to server physician reimbursement from the hospitals' cost-plus system in the 1965 construction of the two forms of Medicare. The voluminous reports of the Health Policy Agenda, and the Cost Containment Commission both of them AMA sponsored and funded document the strenuous efforts of the AMA to substitute market mechanisms for the insurance-driven non-market reimbursement environment of the health industry. It is perfectly true that each action in this evolution of AMA policy has been opposed a debated by individual delegates with either non-market ideologies or self-serving motives. Please notice, however, that these free agents within a system of free speech and adversary debate did not win the important votes on the subject, and their views are not AMA policy.

The foregoing paragraphs were written from the viewpoint of trying to get Congress to adopt a policy which is congenial to the mainstream views of both the Cato and the AMA; let me turn to some ideas about developing a better historical analysis of some of these issues, which my position perhaps helps me suggest.

In the first place, I think it would help us understand the best limits of free trade within the medical industry to go back to the 19th Century when the AMA created the system of medical licensure, and successfully piloted it through the various legislatures. Please remember that as recently as 1900 the AMA only constituted 7% of American physicians, and was then a small group of lonesome idealists, trying thought processes went along the lines of what improved the medical profession improved the health of the citizenry, and vice versa. Notice, however, the difference between what they meant by being Good for General Motors. The AMA wanted to limit the license to those most qualified to have it, and the Flexner Report of 1914 extended the idea to medical schools. I think it would be very interesting to trace the effect of these actions on physicians income, at the same time that some sort of effort was made to quantify the improved health of the country which might be attributable to the monopoly thereby created. I have the impression that the economic benefits of the effort lagged the health benefits considerably, and in fact, I have the impression that the generation who created the license/ monopoly (citizens as well as doctors) did not live to extract ay great personal benefit from it. Perhaps some scholarly analysis could shake my conviction, but I have the impression that the creators of the system knew very well that it wouldn't do them much good they rightly thought their efforts were for posterity. Perhaps Peter Ferrara is entitled to reply that the creators of Social Security had their main effect on posterity, too, but I don't believe they saw it that way at the time, while the doctors did.

So maybe license was an idealistic idea gone wrong, but I doubt if it is fair to characterize it as a conspiracy to raise prices, no matter what Adam Smith said. But even that theory might be defended as being in the public interest look at what has happened to education as we impoverish the teachers.

The second interesting part of the medical marketplace story is a legal one, and I hope the authors have the legal background to explore the implementation of Milton Friedman's ideas about the medial monopoly by the Justice Department antitrust division, and possibly also the Federal Trade Commission, but mostly the Justice Department. I have the impression that those young idealists over at Justice have carried plausible manipulation of language to level of abstraction which is going to be unintendedly destructive of some other treasured societal values; and that the incumbents of the legislative branch are not going to have the wit to move quickly enough to keep related systems out of trouble. It troubles me that the AMA is examining this matter purely as a problem of legal reasoning, rather than asking whether the legal arguments can reasonably be followed to their limit without first building bomb shelters for the bystanders.

I think what I mean is that it seems a useful thing for doctors to reprimand a colleague who charges too much or urge their colleagues to reduce fees for poor the antitrust statutes were really not designed to prevent it. And it seems a good thing to urge that medical prices bear some relation to costs, in order to minimize distortions of the provision of care. ANd it seems a good thing to allow enough slack in the system to permit cost-shifts which provide care to the poor which they otherwise might not get. Temporarily, perhaps, and only until a better solution is found. But what I am saying is that the Justice Department appears to me to be attempting something which only Congress should be allowed to address in the Constitution, well, the hell with the constitution or the laws of the Medes and the Persians, or whatever other items of worship the lawyers may produce. It seems to me that the issue is not that the courts are writing legislation, but that the legal profession as a whole cannot restrain itself from that activity. I certainly hope the Cato will not endorse any short-cuts around achieving public permission to enhance the public interest.

Well, this letter has turned out longer than I intended it to be, and I hope my main feeling, which is one of enthusiasm for the book, has not been smothered. I would be happy to meet with the authors or comment on the manuscript, in the spirit of trying to avoid those minor errors of fact, upon which their debating antagonists are so likely to focus.

Sincerely Yours,

George Ross Fisher, M.D.



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