Perhaps the most well-known part of the 1965 Medicare creation tale is the opposition by the American Medical Association (AMA) to “socialized medicine.” Yet with financial incentives assuming a new prominence for provider and patient alike, we shouldn’t overlook the AMA’s equally unsuccessful battle against the excesses of capitalistic medicine. The forgotten story of the professionalism’s failure to contain physician greed provides an important policy perspective.
The Myth Of Medicine’s ‘Golden Age’
Medical practice pre-1965 is often portrayed as a mythical “Golden Age.” The truth, as I found researching my 1997 book, Demanding Medical Excellence: Doctors and Accountability in the Information Age, was that the post-war years were a time when way too many doctors grasped for the gold.
The most common “entrepreneurial” excesses were fee splitting, where a specialist paid a kickback to the referring doctor, and ghost surgery, where a surgeon secretly paid a colleague to operate on an anesthetized patient. The first surgeon paid the “ghost” a small part of the total fee and pocketed the difference. Even worse was rampant surgical overuse, where common excesses included appendectomies for stomachaches and hysterectomies on young women with nothing more than back pain.
Although professional societies wielded far more influence than now, efforts by leaders of the AMA and the American College of Surgeons to stop these abuses repeatedly fell short. Doctors “display a consistent preoccupation with their economic insecurity,” a 1955 report by the AMA concluded with discomfiting bluntness.
They think about money a lot — about how to increase their incomes, about the cost of running their offices, about what their colleagues in other specialties make, about what plumbers make for house calls and what a liquor dealer’s net is compared to their own.
A 1956 AMA poll found that 43 percent of patients thought their doctor charged too much, an opinion reflected in a 1959 cartoon in The New Yorker. A balding physician is pictured making a house call to an elderly matron. As she glares from her bed, the doctor opens his little black bag and wads of paper currency pop out. “Pshaw! I grabbed the wrong bag,” the doctor exclaims.
Despite this public unease, policymakers were unwilling to intrude on professional prerogatives. Economist Kenneth Arrow explained in a landmark 1963 essay that the market for medical care was unique because outsiders could not judge the quantity or quality of services provided. Instead, the “behavior expected of sellers of medical care is different from that of business men in general.…The ethically understood restrictions on the activities of a physician are much more severe than on those of, say, a barber.” Or plumber.
Medicare Takes Effect
This was the environment in which Medicare took effect on July 1, 1966. To appease the AMA, physician payment was based on a local calculation of a “customary, prevailing and reasonable” fee. However, doctors did not have to accept Medicare’s fee as payment in full (i.e., “take assignment”) for any individual patient. With professional self-control the only control, the rate of increase in doctors’ fees doubled. (The net income of nonprofit hospitals shot up 76 percent between 1965 and 1969, but that’s part of a different story.) Establishing a perennial policy staple, the very first National Conference on Medical Costs convened in June 1967.
Speaking at an AMA conference later that year, AMA president Milford O. Rouse noted that physician fees were rising faster than the cost of food and housing, and he urged members to address “efficiency, cost and methods of delivery” of health services in order to preserve freedom from further government intervention. As in years past, that plea did little to ameliorate profit maximization.
In July 1969 the Senate held hearings on Medicare and Medicaid fraud, with senators denouncing “ruthless providers of health services” who routinely charged the government two to four times what was billed commercial insurers. One general practitioner had billed Medicare $58,000 for home visits to 49 patients. Quipped Senate Finance Committee chairman Russell Long (D-La.): “Who says you can’t get a doctor to make a house call anymore?”
Later that month, President Richard Nixon declared the first health care “crisis.” John G. Veneman, undersecretary of what was then the Department of Health, Education, and Welfare, made a prophetic pronouncement whose candor is difficult to imagine today. Veneman declared: “In the past, decisions on health care delivery were largely professional ones. Now, the decisions will be largely political.”
And so they have been. The 1965 law envisioned voluntary oversight by local physicians of colleagues’ care. When doctors showed no appetite for second-guessing peers, the Social Security Amendments of 1972 authorized Medicare to disallow “any costs unnecessary to the efficient[emphasis added] provision of care” and established Professional Standards Review Organizations (PSROs). That pattern of periodic legislative responses to curb abuses of market power by physicians has continued ever since through Republican and Democratic administrations.
To give two prominent examples, the Omnibus Budget Reconciliation Act (OBRA) of 1989, signed into law by President George H.W. Bush, referred to increasing the “effectiveness, efficiency and quality of health services” and changed Medicare physician reimbursement from “usual” charges to fees based on the resources needed to provide those services. In that same vein, the Obama administration’s passage of the Patient Protection and Affordable Care Act of 2010 detailed a host of changes to physician and hospital payment under Title III, “Improving the Quality and Efficiency of Health Care.”
Buyers Become Less Timid
Back in the 1930s, the AMA opposed all health insurance on the grounds that “no third party must be permitted to come between the patient and his physician in any medical relation.” That set a pattern that implicitly intertwined the financial and clinical, whether in opposition to Medicare in the mid-1960s or in the mid-1980s, when the AMA’s top executive told The New York Times that Medicare’s use of diagnosis-related groups for hospital payment had doctors “worried that they’re not going to be allowed to practice medicine…based on their own judgment.” Medicare’s new payment policy was said to invade the doctor-patient relationship, and the AMA warned darkly of “rationing.”
Similar charges are regularly hurled at Medicare today. A more accurate characterization is that a program that began as a timid buyer of medical care has become a much smarter shopper. Rather than being “socialized medicine,” Medicare has been consistently molded by Republican and Democratic policymakers alike into a tougher and more demanding purchaser on behalf of the American public. That’s not rationing, but the rational economic behavior capitalism celebrates. Unsurprisingly, physicians, hospitals, pharmaceutical companies, and others who’ve lost market control aren’t eager to acknowledge this reality.
A 1993 poll by the AMA, at a time when the Clinton administration reform proposals seemed on the verge of becoming law, found that an all-time high of 70 percent of the public was beginning to lose faith in their doctors. Sixty-nine percent thought doctors were too interested in making money. The forgotten story of Medicare payment policy suggests there were times when the leaders of American medicine might privately have agreed.
Policymakers can learn several lessons from this history. To begin with, accountability and paying prudently strengthen the doctor-patient bond rather than weaken it. Unrestricted fee-for-service payment has often undermined public trust. It is telling that a recent cartoon in The New Yorkerechoed the exact same suspicion of misaligned incentives reflected in the 1959 cartoon mentioned above (and, for that matter, much earlier by Mark Twain and George Bernard Shaw). A physician looks at a clipboard with test results while speaking to an anxious patient sitting on the exam room table (no more house calls). The doctor says, “Of course, this could also be confirmation bias from me wanting you to get sick.”
At the same time, every method of physician payment has drawbacks and dangers, and value-based payment is no exception. “Better, smarter, healthier” is a worthy goal, but any incentive can lead to unanticipated and undesired consequences. Consolidation of commercial insurers combined with new payment strategies by Medicare could also push the pendulum too far in the opposite direction. Whatever the failings of fee-for-service physicians, health insurers, and large hospital systems, including those nominally organized as nonprofits, are hardly immune from abuse of economic power.
Consumers’ costs of care can be pushed up by the consolidation of local providers, raising prices, or by consolidation of insurers, raising premiums, or simply because certain “must-have” hospitals charge top dollar for their services. Some physicians could also be excluded from coverage by a health system that includes only its employed doctors in a plan or by a health insurer whose take-it-or-leave-it payment scale leaves some doctors out in the cold.
The more fundamental question is what “fair” physician payment really means in an era very different from when Medicare was signed into law. While physicians complain vociferously about income, a recent survey of median wages based on Bureau of Labor Statistics data found that six of the top 10 jobs were held by health care professionals, with surgeons leading the way.
Meanwhile, an article in the August issue of the AMA Journal of Ethics examining the history of “money and medicine” refers to the “ethical challenges” posed by “overconsumption” of medical services by patients with good health insurance, “aided and abetted by fee-for-service payment policies.” Doctors, in this reframing, simply “did their very best to accommodate the growing demand.”
For more realistic guidance to the future, policymakers would do better to consider a recent editorial in the Journal of General Internal Medicine that proposed a new social contract, one that secures appropriate income and autonomy for physicians in return for a professional embrace of genuine accountability. Whether or not this prescription is exactly the right one, the bipartisan history of Medicare payment reform should encourage policymakers to put aside polarizing rhetoric and thoughtfully engage in efforts to provide better care with smarter spending.