One hundred years of managed care

A tragedy in five acts (and the triumph of progressivism)

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This is the wrap-up to the series on the economic history of the American healthcare system, the first installments of which can be found here and here.

The term “managed care” entered the common lexicon in the 1990’s, when contracted arrangements between physicians and hospitals on the one hand, and insurance entities on the other, became standard means to try to control healthcare expenditures.  The origin of the concept is frequently credited to Dr. Paul Ellwood and his influential Jackson Hole Group, who introduced the idea in the early 1970’s.

But in our 2-part series on the economic history of American medicine, we saw that healthcare has been “managed” from its inception in the late 1910’s, when the Flexnerian reforms and the ensuing medical licensing laws began to influence (and limit) the type of medical care Americans could choose to receive.

Since that time, an ever-growing managerial class of academics, industry leaders, technocrats, and private foundation believers in “systems” and in a “scientific” approach to organizing society has been guiding the various government interventions which have shaped American healthcare as we know it today.(1)

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

From the Great Depression to the present time

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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.

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

From the pre-Flexner era to the great depression

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This is the first of a 2-part series. You may find part 2 here.  Note: The article was updated on 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.

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

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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. 

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