An economic history of the American health care system – Part 2

From the Great Depression to the present time

Blue Cross Blue Shields Headquarters, By DanielPenfield (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons
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This is the second of a 2-part series. You may find part 1 here.

Q: What alternative models of health care payment were sought during the Great Depression?

A:  Taken aback by the sudden surplus of hospital beds, and realizing that patients and families were not willing or able to use hospital services at the prices demanded, leaders of hospital associations and of medical associations, such as the American College of Surgeons, began to look for models of collective health care payment.

They remarked that European countries which had adopted government-funded health plans did not seem to have the same problem of surplus capacity.  The apparent ability of European systems to coordinate supply and demand reinforced the belief of these American leaders that a similar plan would be desirable for the United States.  But political opposition to a national health care system was strong, and the medical community itself was divided on this idea.

What cardiologists can teach economists

A tribute to Kanu Chatterjee

Digitalis Purpurea By Norbert Nagel (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons
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I wrote an earlier version of this post in 2011.  In light of the current economic and financial turmoil, it seems all the more relevant.

I had the great fortune and pleasure of studying under the late Kanu Chatterjee during my cardiology fellowship at the University of California San Francisco.

In the early 1970’s, Dr. Chatterjee was among the first to understand the benefits of “afterload reduction” for the treatment of congestive heart failure:


Prior to that time, giving medications that could lower the blood pressure was often seen as heretical.  In fact, during the 1950’s and 1960’s, the treatment of heart failure sometimes consisted in applying measures to raise the blood pressure and increase the work of the heart.

The concept of afterload reduction introduced by Dr. Chatterjee and his colleagues was revolutionary.  With such a treatment, mortality rates in heart failure were improved for the first time.

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

From the pre-Flexner era to the great depression

"Barter-Chickens for Subscription" by F.S. Church via Wikimeida Commons. Public Domain.
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This is the first of a 2-part series. You may find part 2 here.

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 realistic 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.

Canadian medicosclerosis and American medicomania

Impossible to compare

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I follow several physicians from Canada on Twitter.  Since I do not have first hand experience of that health care system, I find their accounts instructive.

Some tweets are sadly biting:

Shawn Whatley, a Canadian physician I also follow, wrote in a recent blog post entitled “Medicine resists change” that:

Canadians took a bold, progressive move in the 1960s and created Medicare. And we’ve blocked change ever since.

Sure, we dribble in new technology. Embarrassment demands we buy at least a few PET scanners and robotic surgical assists. But our core system is unchanged.

Government and Organized Medicine insist that basic clinical services work the same as in the 1960s. Patients see their family doctor. Doctors send patients for ‘high-tech’ X-Rays, ultrasounds or blood tests. Patients drive to licensed and controlled lab facilities. Then they trudge back for results days later.

That sounds grim.

Will a single payer system cure the administrative bloat? A Hayekian perspective

Friedrich Hayek, 1959.  Source: Austrian Public Library, via Wikimedia Commons (public domain)
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UPDATE: This article was cross-posted on the Ludwig von Mises Institute website. It also prompted a rebuttal at the Progressive Physician website, to which I made a brief reply in a more recent post contrasting the Canadian and American health care systems.

In contrast to the expected shortage of tens of thousands of physicians, there appears to be an abundance of health care administrators, at least judging by the following graph:


The originators of the graph—economists and physician-activists at Physicians for a National Health Program (PNHP)—invoke the administrative bloat as reason to promote a single payer system.  With a single payer, they argue, complexity will be greatly reduced, the administrative burden wiped out, and costs brought under control.

For those who contend that administrative positions consist chiefly of make-work jobs soaking up a glut of workers otherwise destined to swell the ranks of the unemployed, this outcome could indeed be welcome.  Unfortunately, if PNHP gets its wish, we may all discover that gluts and shortages are enhanced, not avoided, by the central planning process that would necessarily accompany the establishment of this program.

On the looming shortage of doctors

Unemployed men queued outside a depression soup kitchen opened in Chicago by Al Capone, 1931. Public Domain via Wikipedia
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I keep getting served a Facebook ad from the American Association of Medical Colleges imploring me to ask politicians to fund residency training for medical school graduates.  The link leads to a webpage with neat graphics and a series of well-designed cartoons dramatizing an ominous shortage of 90,000 doctors expected to occur by 2025.

Now, the notion of “doctor shortage” by itself is meaningless.  Doctors—like plumbers—are a scarce resource and therefore always in shortage.  Patients have always had to contend with waiting rooms, whether at the outpatient clinic or in the emergency department.  People have always had to wait to see a specialist, especially a good one, and this will never change.  The supply of doctors must be judged in the context of the needs of patients and the economics of supply and demand.

But here’s the rub.

Population medicine: The other “dismal science”

Golconda by René Magritte.  1953.  The Ménil Collection, Houston.
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On May 18, the website of the Ludwig von Mises Institute ran a slightly edited version of this article. You can find it here.

In its current usage, the phrase “dismal science” is a disparagement leveled against mainstream economics for its failure to provide a coherent account of economic activity.

According to Austrian school critics of the neo-Keynesian synthesis, this failure is in large part due to a foolish determination to bring into economics the mathematical precision of the physical sciences.  To achieve this precision, neo-classical economists disproportionately focus their inquiry on global measures of economic activity: gross national product, aggregate demand, global supplies of money, goods, or labor, and other variables that lend themselves to quantification and numerical modeling.  Lost in mainstream economic analysis is the attention due to the individual economic actor who, by virtue of his or her power of self-determination, is ill-suited for the equation or the graph.

A similar love affair with quantitative methods has rapidly taken over the medical field over the last several decades.

“Intolerable” laissez-faire in medicine: the early years of the Mayo Clinic

Mayo Medical Center
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Shortly after its initial posting on this site, this article was also cross-posted on the website the Ludwig von Mises Institute under the title “The Mayo Clinic and the Free Market.” I have made some very minor edits since then. MA. April 18, 2015.

Neoclassical economists such as Kenneth Arrow and Joseph Stiglitz tell us that the health care market is imperfect (or “Pareto inefficient”), meaning that the allocation of services is not optimal from the standpoint of social welfare.   They point to information asymmetry as an important cause of this imperfection: patients cannot distinguish on their own the physician from the charlatan, the surgeon from the butcher, the remedy from the snake oil, the hospital from the coop.  This may lead to moral hazard where the party with the most knowledge can provide inferior service with impunity.

To provide the necessary counterbalance for this “knowledge gap,” experts must be in charge of social institutions that tell patients where to go, who to see, how to be treated, and how much it should cost.  This has been a principal and virtually unchallenged argument underpinning health care legislation in the last 100 years.  In a famous paper he wrote on the subject in 1963, Arrow declared that “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”

But for those who wonder how intolerable the “laissez-faire solution” really is, a short booklet published in 1926 may prove instructive. 

On the Squandering of Medicare’s Money

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Emperor Joseph II: My dear young man, don’t take it too hard.  Your work is ingenious.  It’s quality work.  And there are simply too many notes, that’s all.  Just cut a few and it will be perfect.

Mozart: Which few did you have in mind, Majesty? (Amadeus, 1984)

The New York Times recently published an opinion editorial entitled “Squandering Medicare’s Money” in which Dr. Rita Redberg, professor of cardiology at UCSF, proposes that much of Medicare’s financial deficit could be reduced if the government did not spend “a fortune each year on procedures that have no proven benefit.”   To support her contention, Redberg cites several studies which indicate that many routinely performed tests and treatments do not improve patient outcomes in any measurable way, and are therefore “unnecessary.” Examples given are screening colonoscopies for patients over 75, PAP smears for women over 65, coronary stents for people with stable angina, and so forth.  At an estimated cost of $150 billion, these procedures seem like obvious candidates for the deficit-reduction chopping block.

The mother of all risk factors

Photo credit: Lewis Hine (1874-1940) via Wikimedia (Public Domain)
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In 1961 the Framingham study investigators introduced the term ‘risk factor’ to the medical community and ushered in the era of risk modification, now a dominant strategy for the prevention of diseases.  Academic careers have succeeded and private enterprises have flourished on the promotion of this paradigm.

Currently, risk-factor reversal is an established surrogate for quality of care and a cornerstone of most pay-for-performance schemes allegedly designed to improve health outcomes.  One particular risk factor, however, stands out by virtue of the unusual treatment it receives from public health advocates.