Starting in the 1930’s, the American Medical Association (AMA) reluctantly agreed to accept a health insurance model because they feared the federal government would overreach into the health care sphere. They decided that the best way to protect themselves was to have only the insurers finance health insurance. A huge component of this was that every physician would be paid for each service they provided during a patients’ visit. Essentially, the AMA drove health care costs up by incentivizing physicians to provide any relevant tests because they would be paid for every service during each appointment. To the physician, they were charging a faceless third party somewhere, for each service, rather than thinking they are charging their patients for each service. Therefore, costs were already a huge problem before Medicare passed in the 1965. Today, we have to look at how hospitals and doctors are incentivized in order to analyze our overall health care system. Essentially, the AMA enabled government intervention in the health care system, when they originally agreed upon the creation of a health insurance market to prevent government interference.
When was the discovery of germ theory and how did it change the sphere of health care? How did the American Medical Association increase the professionalization of doctors? Are we rationing health care or are we over‐providing it? What percentage of the GDP does the U.S. spend on health care? Do we demand more out of health insurance than insurance can handle?
00:05 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.
00:08 Aaron Ross Powell: And I’m a Aaron Powell.
00:08 Trevor Burrus: Joining us today is Christy Ford Chapin, an Associate Professor of History at the University of Maryland, Baltimore County and a visiting scholar at Johns Hopkins University, she is the author of “Ensuring America’s Health: The Public Creation of the Corporate Health Care System.” Welcome to Free Thoughts, Christy.
00:24 Christy Ford Chapin: Thank you for having me.
00:25 Trevor Burrus: Your book is a fascinating history of how we have a convoluted and dysfunctional medical system or how we got there. And a big player in the book is the American Medical Association. When did the American Medical Association start and what was it like at the beginning?
00:44 Christy Ford Chapin: Well, it was founded in 1847, and when it was founded during the 19th century, it wasn’t particularly powerful, it was during a period before the discovery of germ theory, so physicians were having a lot of difficulty just establishing themselves as a profession that was prestigious and convincing their patients, for example, that they had expertise that was over and above. For example, perhaps a midwife or some type of alternative practitioner, like eclectic practitioner, or homeopathic physician.
01:19 Trevor Burrus: And, but that’s… So by the, say, 1880s or so when they started getting more professionalized?
01:25 Christy Ford Chapin: Yes. So the 1880s is with the discovery of germ theory, so the first time we have effective medications and vaccines and such, and that was very widely covered. It wasn’t like this was something that occurred in academia and nobody knew what was going on. This was covered in the newspapers and people were very excited about all the things that were going on with medicine and so this gave the AMA and physicians a lot more power and what they had wanted, for so long, going back to the 18th century, is licensing law, so that only, so that they could have some type of control over who could call themselves a physician and practice as a doctor. There were some weak licensing laws that were already in place. There had been some passed at the end of the 18th century, beginning of the 19th century; a lot of those were actually overthrown during the 1830s and such, during the Jacksonian period.
02:18 Christy Ford Chapin: So now that they had this new expertise, and they were starting to enjoy a lot more social standing, they were using that power to get licensing laws either strengthened, or passed at the end of the 19th and beginning of the 20th century. And this was really key to the power that they would exercise over the health care market because with their control, the power they had over hospitals and the power they had over licensing boards, they were able to act. The AMA Association, its leaders, were able to act as the regulators of the healthcare market.
02:53 Aaron Ross Powell: At the time that they were doing this, that they were agitating for licensing, how many physicians were members of the AMA, what portion of them were… Was it most of them?
03:03 Christy Ford Chapin: Well, at the end of the 19th, the beginning of the 20th century, they would have still been in the process of establishing medical associations in states, counties and cities. So that’s one thing that gave them a lot of powers. You have the national association headquartered in Chicago, then each state has an association and then physicians join the association, if they’re accepted at the local, city or county level. So during this period as you can imagine, with the country expanding out West, they’re still expanding the association. But I would say the height of their membership you really see during the post‐World War II period, but they’re building up to that. Say by the early 1950s, they have… Oh, about 70% to 75% of physicians who are practicing and well, 70% to 75% of physicians that you could imagine that people for example who were still in training or retired might not belong. So at that point, they were all through, I would say the first half of the 20th century, they were growing in power.
04:09 Aaron Ross Powell: So then when they were pushing for the… When they’re first pushing for the licensing, was there much debate, were there physicians who disagreed with this or was it kind of all physicians, whether they were members or not, were pretty on board with licensing.
04:25 Christy Ford Chapin: Most physicians were on board with licensing, even the ones who hadn’t gone to fully accredited medical societies, or even… There were physicians who, excuse me, fully accredited medical schools. There were even physicians practicing at the end of the 19th, the beginning of the 20th century, who had only done an apprenticeship and that’s it, but with the licensing laws they would have grandfathered all of them in. So the vast majority of your physicians would want this because they would understand that it would cut down on the supply of medical practitioners and increase their fees.
04:57 Trevor Burrus: It seems that the story kicks off after we have the licensing and the increased professionalization of doctors, via the AMA in the first few decades of the 20th century, but it really kicks off in the ‘1930s, when things have changed a bunch. We have more corporatized system, we have a bigger economy, we have even more professionalized medical guild, and they start being concerned about how people are paying for healthcare. So talk a little bit about what was going on there.
05:26 Christy Ford Chapin: Okay, so as you can imagine with the discovery of germ theory and all the excitement around medicine and all the new treatments that worked so well, and the advances in surgery and such, medical prices were rising. So people being clever as they are were finding all kinds of different ways to pay for healthcare. They wanted to have some mechanism of budgeting for it, because as you know, with healthcare costs, you can have a… Incur large costs very quickly and it’s very… It could be very difficult to forecast and budget, and save for. So, what you ended up having happen is that all kinds of different groups came up with ways of financing and delivering health care. So for example, you had unions, using a portion of their membership fees to contract with physicians, and even hospitals. And unions had all types of different models, they even had one type of model where they actually just employed physicians to work for them. You also had businesses experimenting with different models, for example, they might just hire a physician and have that physician on staff to practice industrial medicine to be looking after the workers and then eventually expand that to their families as well.
06:50 Christy Ford Chapin: There were also consumer cooperatives, a lot of farmers were over consumer cooperatives and contracting with physicians that way. Mutual aid societies, and fraternal orders that tended to represent African‐Americans and then a number of ethnic groups, whether Jewish or Irish or Polish, Croatian, you name it, everybody had their Mutual Aid Association. And these were kind of like social clubs, but they also again with their membership fees would buy life insurance and then eventually also started doing things like contracting with physicians. In fact, in the South, you even had one African‐American Mutual Aid Society that got so large, they built their own hospital for members to use. So you had all these different kinds of models. But the model that I often talk a lot about because it was what physicians really liked to do, and it seems the way the market probably would have gone… Would have been a dominant model in the market if it had not been shut down were the prepaid physician groups and these were multi‐specialty groups. So, imagine one stop shopping, imagine you go to one place and your general practitioner is there, and your cardiologist and surgeon, and there’s a pediatrician and all these different specialties are there.
08:14 Christy Ford Chapin: So they offered high quality integrated medicine and physicians liked practicing this way because they could sit down at the end of the day, if they had a difficult case and talk about it, figure it out, learn across specialties. So that’s one reason they liked it but the other thing is that it was genius the way they set it up because it kept costs in check. With the insurance company model that we have today and I know we’ll talk a little bit more about that, we have very large cost problems, and that the United States is getting close to spending one‐fifth of its GDP on healthcare. So we are the number one spenders in the world, and the second place spenders are all the way back at 12%, 13%, so something is going wrong. Yes, we have high quality medicine but something is going wrong in as far as over‐utilization, but we can talk about that in a second.
09:10 Christy Ford Chapin: With the prepaid physician groups, what was so clever about them is they tied physicians to the bottom line in a way that incentivized them to not want to either give too many services and procedures or to ration care. So the way this worked is people would pay a set monthly fee, either for their family or the individual, and then the physicians acted as insurers. There’s no insurance company, no third party in between, and each physician’s paid a set salary and then a portion of the profits. Whether every quarter, or bi‐annually, or however they set it up. So the physician’s best interest is for this prepaid group to make a lot of money. So the last thing they wanna do is ration care and have their customers leave unhappy and go tell people, “Hey, don’t bother signing up for that prepaid group. They’re very stingy, they don’t take good care of you.” On the other hand, it wasn’t in their best interest to just order every single service and procedure possible to run up a bill because that would have still been coming out of their back pocket.
10:13 Christy Ford Chapin: Moreover, they were incentivized to keep their patients healthy ’cause that would also help them earn more money, so it was a very popular way. There were hundreds and hundreds of these prepaid groups all throughout the country, progressive health care reformers were very interested in this model. In fact, when Truman attempts to pass comprehensive healthcare reform, one of the ideas is that some of his administration officials wanna go back to this model because people recognize that it’s efficient and also delivers high quality care.
10:48 Aaron Ross Powell: This sounds like… What your describing sounds like Kaiser Permanente. Is it a similar set up?
10:54 Christy Ford Chapin: No. [chuckle] No. The problem with Kaiser Permanente is, it is not run by physicians. You have a third party, so Kaiser Permanente, as you well know is, was a company. It was a business that did things like build roads and then of course during the war, they did a lot of ship building, built dams and such. So they were a business not in the business of healthcare, but they ended up contracting with a physician group in order to provide health care for their employees. The difference is, it’s overseen by a business and so it’s business people running it rather than physicians, and also the physicians are paid on salary, so they’re not bought into the program, they’re not tied to the bottom line like the prepaid physician groups. Moreover, even though Kaiser Permanente has different departments of different specialties in one place, they’re not set up the way these prepaid physician groups were that they would have had fewer patients, so that you don’t have Kaiser Permanente physicians getting together or being able to talk about patients and consider a case like you would with these prepaid physician groups.
12:11 Christy Ford Chapin: I think having a third party in there is important because you really have a business supervising physicians instead of physicians in charge of themselves.
12:20 Trevor Burrus: There is a model though. We did an episode a few years ago with a doctor named Ryan Neuhofel, who runs in this direct primary care model which has a prepaid fee, is that more… That’s becoming much more popular. Is that more like what these doctor groups were?
12:36 Christy Ford Chapin: Exactly. So the problem is, with all systems, they either tend to run into problems of rationing care or over‐providing care. Kaiser Permanente, when you hear complaints about it, it tends to be about rationing care, because the physicians are on a set salary, so you see how they’re not tied to caring whether Kaiser Permanente turns a profit or their particular site turns a profit that year. So the direct primary care is much more like what I’m describing, except for they are now, as they’re rolling out, and this makes a lot of sense as they’re developing, they’re first starting with general practitioners, they’re not multi‐specialty, but it is certainly an experiment that I’m very interested in and excited to see developing.
13:20 Trevor Burrus: So what did the AMA think of these prepaid doctor groups if they seemed to do a lot of, at least economically, efficient things and provide good health care. How did the AMA react?
13:31 Christy Ford Chapin: Well the AMA, until really the end of the 1930s was against physician groups, especially multi‐specialty. Today, most all physician groups are single‐specialty and they also were, believe it or not, against any kind of insurance. So they were against any kind of… They would also be called prepaid services, they were against any kind of insurance, or prepaid services because they were so afraid of some third party whether a business or a Mutual Aid Society or a union or any kind of third‐party getting involved in the healthcare field and taking power away from them. So that makes sense and is rational, somewhat, but I think they really shot themselves in the foot by viewing the prepaid physician groups the same way. But there’s a couple of reasons that they did. They were afraid that these prepaid physician groups would turn into corporations. Probably more along the lines of Kaiser Permanente because of course, during this period, you have at the end of the 19th century, the rise of the corporation, this is very… This causes a lot of concern and anxiety amongst workers and certainly professionals, what the physicians don’t want to happen is they don’t wanna get sucked into a big bureaucratic hierarchy, and have to work for somebody else.
14:48 Christy Ford Chapin: Basically, they don’t wanna be… They don’t wanna be like the accountants or the engineers who get pulled into the corporation, so they’re trying to keep away any type of corporate organization. And then they’re also fearful that if they organize the market, it’ll be easier for the government to step in and create a program. And they’re looking at Europe and thinking about this, they’re thinking about things that were similar to a lot of the different models, I’m talking about going on and say, England, or Germany, and how those are countries, where early on with Germany in the 1880s, with England in 1911, that you have the government entering into the health care market to fund services.
15:32 Trevor Burrus: But they eventually go with insurance and they feel compelled to, for some interesting reasons, one of them being that there’s an anti‐trust suit. There seems to be a really interesting, almost coincidence where there is an anti‐trust suit that the government is bringing against them, and then they eventually come out and they say, “Insurance.”
15:50 Christy Ford Chapin: Exactly. So the anti‐trust suit is pretty important, but what I think is even more important is that during the 1930s, of course, you have all this unprecedented experimentation as far as economic policy goes at the federal level. And as many of your listeners will know, the 1935 Social Security Act gets passed, creating social security, unemployment benefits, what we often call welfare, with funding the state welfare programs and when that passes, the people creating that legislation really wanna put healthcare funding in there too. Roosevelt, consummate politician that he is, very savvy, realizes that that could sink the entire bill if he has opposition from physicians. So he very politically astutely says, “No.” But that really starts the… Kicks off what we will see is attempt after attempt at the federal level for the federal government to get more involved in health care, to create some kind of programming or financing to provide healthcare for people.
16:54 Christy Ford Chapin: That’s what really gets the AMA leaders very nervous. So what they decide to do is make a compromise. They still don’t wanna see anything like multi‐specialty groups, but they reluctantly agree to accept insurance but, and this is the big but, it’s only gonna be the kind of insurance they approve. The Kaiser Permanente will always be there and be a little pesky, but it’s gonna be pretty minor. They were able to drive out a lot of the other models just by revoking the licenses of physicians that don’t follow what they say and they were able to… What they were able to do is create their very own insurance model. And the insurance model that they create, and really kinda just pull out of thin air; you have a few national AMA leaders doing this, it’s very inefficient and costly. If you can imagine, ’cause the market doesn’t kind of naturally come up with it on its own, they just make it up, they just get together and make it up and they decide that, “Okay, if we have to accept insurance and we’re gonna accept insurance in order… For political reasons, to tell policy makers that we don’t need them to get involved. The private market’s doing just fine. We’re now supporting insurance, we’re helping spread it.” But they decide the best way to protect themselves is to have only insurance companies funding insurance, okay?
18:15 Christy Ford Chapin: So no unions, no prepaid physician groups, no consumer cooperatives, mutual aid societies, all of that. They’re gonna continue to do everything they can to stop and do a very effective job of shutting most of those down and preventing their growth. But the reason they decide that they only wanna work with insurance companies is because insurers during this period are just headquartered usually in one place and if you think that they’re financing physicians all over the country, in the minds of AMA leaders, “Well, okay, now there’s a third party involved in medicine, but at least they’re way far away, so they can’t come and supervise us and tell us what to do.” Whereas a prepaid group, everything is local, or a union, everything is local. So this is the bet they’re making, they create this model, only insurers can finance it. No multi‐specialty groups.
19:10 Christy Ford Chapin: A big key to this is fee‐for‐service payment. That physicians are to be paid for every single service and procedure they offer. So they cannot be paid a set fee, a set capitation fee, like a set annual fee for each patient they take, or even a set office fee for each time a patient comes in. If a patient visits the office and they provide a number of services, say they take their blood, they do certain tests, labs, diagnostics, they can charge a separate fee for each and every one of those services. So that’s one of the keys to starting to really drive healthcare cost problems, is you’re incentivizing physicians. And I think we can all see how this would happen. I’m sure all of us would end up going along with something like this too, you’re in your mind rationalizing that you’re giving your patients gold standard care, right? It’s also a way to make up for example, for all the charity medicine, you might be giving away. And initially also physicians are allowed to set their own fees.
20:14 Christy Ford Chapin: Now, they can’t do that anymore, now they follow fee schedules but initially, they’re setting their own fees so you have problems with bill padding. And then again, even if you were the most careful, ethical, scrupulous physician, you are supposed to set your fees with what’s in the area, you’re not supposed to way undercut other physicians. So if you’re just going along with what everybody else is doing, you see how your fees are gonna creep up kind of artificially not because of market conditions, but because they’re just deciding what they wanna build because they’re not worried about it. It’s not like they’re asking their patient for all this money, they’re asking a far‐away, faceless impersonal… Unpersonal corporation for this money. So this is… Creates a big problem.
21:01 Aaron Ross Powell: What did patients think of all this, as this change was happening?
21:05 Christy Ford Chapin: Well, patients probably didn’t really realize this was going on. They were very… Patients were very, very happy with the prepaid physician groups that I’d mentioned. Now some of… Some of what the AMA was doing to shut down the other models was covered in the press and so people were unhappy about that, who were aware of what was happening. Otherwise, a lot of patients would have been getting their insurance through their employers, and they probably wouldn’t be thinking too terribly much about how this was being organized. I would say, a lot of rank and file physicians were unhappy with the way the AMA was conducting itself because really, you have a few elite leaders making these decisions where the rank and file physicians, they would be happy to practice in prepaid groups or contract with a farmers consumer cooperative or a Mutual Aid Society.
22:03 Christy Ford Chapin: But you have the AMA printing warnings in the Journal of the American Medical Association saying, “If you do this, we will come after you and get your license revoked.” Or also they would get their hospital admitting privileges revoked. Or they would get expelled from the Medical Society, which meant they wouldn’t be able to buy malpractice insurance, so they were very… They were able to… And I even have seen places where some of the physicians who are running these alternative models said, “Yeah, there are plenty of physicians who’d like to work with me, but they say they can’t ’cause they’re afraid. They’re afraid to come and take a job with me because they’re afraid of the repercussions on their career with what the AMA would do.”
22:41 Christy Ford Chapin: So I think the physicians recognized what’s going on, but they end up having, if they wanna keep their careers, the only ones who are really able to fight it are the ones that are… Have enough press, or somebody politically powerful enough to protect them, otherwise there’s nothing they can do, so the physicians just have to go along with what the AMA insist on.
23:05 Trevor Burrus: Well, that’s what I was asking about ’cause some of these tactics that they used to threaten license, to threaten referrals hospital admitting privileges, that seems to violate anti‐trust law. And at one time, the Justice Department actually did try to say that they were violating anti‐trust law, which may be incentivized them to make a switch.
23:28 Christy Ford Chapin: Right. And that was in the early ‘1940s, that anti‐trust suit, they weren’t happy of course that they got ruled against, ’cause they felt like they were allowed, they got caught in Washington DC basically going to hospitals and telling the hospitals to turn out any physicians who were involved with this model. That was… It was a cooperative group, it was kind of similar to Kaiser Permanente that federal employees were working with, so they were upset about that but there wasn’t still a lot the government could do about some of the ways they were able to pull licenses. That was very specifically with a hospital case, they were able to still exert a lot of this pressure, the government wasn’t able to go and say, “Well you kicked these people out of the Medical Society.” None of that was ever followed up on, so that was kind of a slap on the wrist, it was somewhat important, but also by this point, the AMA comes up and creates the insurance company model in 1938, so they’re already starting to roll with “This is the model that we are supporting, that we’re holding up to policy makers saying ‘We do not need healthcare reform. The private market is doing just fine, we have this insurance… ’ ” They’re just calling it insurance, they’re not saying it’s the insurance company model or a specific model.
24:43 Christy Ford Chapin: So what you have is really, especially by the end of the ‘40s and into the 50s, you see physicians and insurers very explicitly saying… ‘Cause neither of them are very happy about this. The AMA wasn’t happy about having to accept an insurance, especially the leaders. And insurance companies, their leaders were not happy about getting involved with this ’cause they looked at what the AMA demanded and said, “This is crazy, this is gonna drive up costs, this doesn’t make any sense.” But they kind of reluctantly get pulled in as well, because they wanna help the AMA defeat what they would say socialized medicine or any kind of universal, comprehensive, program coming out of the government. Because there’s this idea among businessmen coming out of World War II that if the healthcare sector falls so to speak, to comprehensive federal management or nationalization then that’s gonna set a precedence that’s going to sweep through many other economic sectors.
25:42 Christy Ford Chapin: So the insurance companies are thinking, “we’re gonna step forward, take the bullet on this one, and work with the AMA to expand this fundamentally flawed [chuckle], fundamentally inefficient, really hare‐brain idea of a model,” this insurance company model. And they’re racing to cover as many people as they can, especially in the ‘50s and every meeting, every board of trustees meeting, annual meeting, every time physicians and insurers get together to talk about healthcare, and the healthcare market, they repeatedly say, “We have to expand it and we have to make the policies more generous in order to beat back federal reform.”
26:20 Christy Ford Chapin: So they’re really organizing the market as a political answer, more than being concerned about efficiency and market structure and such. Because even though Truman’s plan is defeated by the early 1950s, his plan for universal care, what a lot of people overlook is, all throughout the Eisenhower administration, people are trying to reform health care. Because even the ones who are against Truman’s bill, say, some of the Conservative Democrats and the Republicans, they still agree with the premise that this model is faulty, and it’s not going to be able to cover enough people. So, Eisenhower offers a reinsurance reform program and then you have numerous groups in Congress, sometimes they’re bipartisan, sometimes they’re entirely Republican, offering different reform programs in order to expand insurance to more of the population and the whole time the insurers and physicians are going to them and saying, “We don’t need this, look at how quickly we’re expanding coverage. Look at how much more generous we’re making insurance. We do not need you getting involved in the market.”
27:27 Aaron Ross Powell: What did the overall economics look like at the time? Because right now, the problem with our existing insurance thing is that costs just keep going up for a variety of reasons, but a lot of that has to do with technological change, and we’ve got access to more kinds of care, but it happens to be expensive care or longer end‐of‐life care that seemed like they might not have been as much of a problem. So was it… Was economically this system at least holding up back then better than it is now?
27:55 Christy Ford Chapin: Well, I would disagree with you about the technology argument. I know it’s something that a lot of people put forward and I think yes, technology of course is going and actually, as you say, to the number of procedures we have and diagnostics and such available, and increased hospitalization, ’cause people actually wanna go to hospitals now, they’re not just death traps for the poor; but technology is not driving costs to the degree that a lot of people say it is. It’s really this model that is. And if you look at the statistics from this period, it’s pretty clear as well. So for example, at the end of the ‘1940s, really when this insurance company model is taking hold, say you have like 30 percent of the population covered by now with it. This is when you see the costs increase for healthcare, they jump up in the CPI, in the consumer price index, higher than any other bucket of spending, whether it’s transportation, housing, clothing, entertainment, whatever it may be. And it pretty much stays there, increasing in price more dramatically than any other type of cost all the way through, of course the ‘40s, ‘50s and of course the ‘60s.
29:06 Christy Ford Chapin: Now, we often hear the story that, “Oh, cost really became a problem after Medicare and Medicaid passed in 1965,” they were already a huge problem before that. In fact, if you go back and even look at the media coverage during the time you can see it there, because the insurance cost, the cost of a policy is going up 10%, 20%, 30% every year. And there’s also somewhat of an epidemic of unnecessary surgery going on. ‘Cause we talked about the problem with the fee for service and the insurance companies not allowed to supervise or ask any questions of physicians, so of course, you had over‐utilization, and fee padding but unfortunately, you did have some outright fraudulent physicians who would just perform surgeries in order to collect a quick fee.
29:55 Christy Ford Chapin: And this started being discovered by the pathologists in the hospitals who would realize afterwards, “Hey, 70% of the hysterectomies we did were not medically necessary.” Or, say with appendectomy. You expect to find, okay, maybe 10% or so the tissue wasn’t diseased, we guessed wrong. You certainly don’t expect to find 60–70% or more of healthy organs coming out. And so you start seeing this crisis of unnecessary surgery. I think across the decade I believe, the number is… The number of services and procedures ordered to go along with a patient for each hospital admission increases six‐fold.
30:44 Christy Ford Chapin: Now, yes, some of that’s gonna be technology, new procedures and diagnostics, but not times six. That is a lot more than… Than technology can account for. And also, for example, you have Blue Cross, which is a big hospital insurer during this period, and of course still is. Their studies show that, for example, approximately one‐third of all hospital admissions aren’t even necessary, but it’s an easier way to get the patient in somewhere where it’s paid for and then order a lot of different tests and services and procedures, to either run up a bill, but there are even examples of ridiculous things where a couple wanted to go on their honeymoon, but didn’t have a place to put their children, and so the doctor admitted them to the hospital so then he could just charge Blue Cross, yeah. [chuckle] So you have a lot of stories like this. So you can see… You can see why the insurers are concerned because they can’t control any of this, they can’t… And costs are just, you know… The cost of every service and procedure is skyrocketing and then of course the amounts. So, well before 1965 and the passage of Medicare, costs are a huge problem.
31:54 Trevor Burrus: In the insurance model in general, we have the employer‐provided which you mentioned previously existed to some extent in the 30s, but I don’t think that more than 50% of people had health insurance or I’d be surprised, in the ‘30s. But one thing we talk about in the policy world and you hear from Republicans, is the coupling of insurance and your job via a tax break that was instituted immediately after World War II, and then put into the tax code so your compensation package, which includes your insurance, is not taxed. Does that have a big role in growing the insurance model or did they push that for a specific reason? Perhaps hiding costs. That’s one thing that, that kind of does, is it hides costs. How does that tax break work?
32:41 Christy Ford Chapin: Absolutely, you’re right about hiding costs. You don’t have consumers who get insurance, through their employers worried about these increases when… And I laughed today when people think “Well, I only pay $100 a month for my insurance.” Yeah, well you don’t see the $30,000 of forgone income every year that you’re not getting as your employer pays the rest. So, certainly. So going back, a lot of people talk about World War II because of the wage freeze, and then employers could attract scarce labor with benefits such as health insurance, I think that’s been a tiny bit overplayed, and I’m pulling from Jacob Hacker and Jennifer Klein here. Certainly that happened, but really it was, it was one of these unintended consequences, small things that going all the way back to 1913, and the setting up of… I forget the name, then of whatever the IRS was, they made the decision to grant businesses a tax break if they provided fringe benefits for their employees.
33:36 Christy Ford Chapin: So, of course, this is a good way when you have businesses trying to keep union organizing out, this is a nice tool for them to be able to provide pension packages, life insurance, health insurance, in order to make a certain argument to their workers. So that is growing… Starting to grow in the ‘30s, at first insurers don’t wanna get involved with it, but they do as I just spoke about with the AMA’s political idea. And so, of course, that’s just growing, even without World War II and the wage freeze, that would have continued to grow and grow. And what you see is insurance companies, and the AMA, actually going and saying, to these businesses, “We need your help on this political project of expanding insurance to keep the government out of the healthcare sector.” So you see them talking to, for example, representatives and officials at the Chamber of Commerce, The National Association of Manufacturers, they’re sending material out to their members, saying, “Yes, this is great. It helps your increases… Decreases turnover with your employees, it helps you with unions, but also politically it is very helpful for you to expand insurance.”
34:50 Christy Ford Chapin: And then, of course, as you’ve mentioned, it’s very useful in that as costs are increasing, the consumers aren’t feeling it as much. What you do have, however, are unions and employers coming down later, especially as we get by the mid‐1950s, they’re really starting to come down on the AMA and insurers and saying this is ridiculous. You guys keep giving us higher… The cost increases year after year are just untenable. So that’s where they’re really feeling a lot of pressure.
35:22 Christy Ford Chapin: And also believe it or not, we talk a lot about employee group insurance, but because of this political project with insurers attempting to cover as much of the population as they could, they sold a lot more individual policies than you would believe. I wish I had the statistic on me, it’s a lot more than it was say for example, even before the ACA was passed in 2010. I wanna say, it was at least 20% if not more of the policies they sold were to the individual market, which as you know, that’s an increase… There are problems with adverse selection, all kinds of problems with selling it to individuals and yet they were doing so in order to be able to go and report before Congress when they went into the hearings that, “Hey look at how much we have expanded healthcare.” But of course, this becomes more and more difficult as the prices are increasing.
36:16 Trevor Burrus: Now what is the fundamentally untenable thing about the insurance… The health insurance market? Because it seems that some type of insurance is not crazy, but it also seems that the interplay between what people… What voters and politicians demand of their healthcare system and how it’s financed that it must cover everything, that it must keep costs low, it must keep people alive and cover everything. And any possibility, including your standard daily procedures that there was a… There was a political demand for that coupled with a system that can’t meet those kind of demands on… If it’s not really insurance at that point, that’s just a third party payer system, and that’s sort of what they created by demanding more out of insurance than they could possibly deliver.
37:04 Christy Ford Chapin: Right, but I think insurance could deliver more than we’ve realized. So for example, with these prepaid groups that I had told you operated so efficiently, they were actually offering maternity benefits all the way back in the 1930s which is pretty radical, [chuckle] cause they were able to do that and able to do it profitably. Because under the insurance company model, when for example, there were some Blue Cross plans that tried to roll it out in the ‘1940s and bankrupted themselves because they were using this insurance company model.
37:37 Christy Ford Chapin: So I think the basic untenable, the basic problem is people look at insurance and say, “Okay, well, consumers don’t care, they don’t shop around, they don’t worry about having over‐utilization.” Okay, that’s true to a degree. And of course, with the employer market, they don’t have a lot of choice as far as insurance plan goes anyway. They get what their employer gives them, if they’re lucky they can choose between two or three options and we can imagine how that would distort, say, for example, the automobile market if that’s the way most people got their automobiles and you could pick between two or three. So there’s that problem, but my argument would be that, you’ve really gotta look to see the way the physicians and service providers, so that would include hospitals, are incentivized. That is the key, I think, in healthcare systems, if you look around the world and in the United States. These are the people with the requisite knowledge to know when a service or procedure should be offered. Yes, they’re gonna sit there and work with the patient and every patient is different, but if you don’t get that incentive, those incentives right, you’re gonna run into either rationing or over‐utilization. So that’s what I would say is the key to all of this.
38:52 Aaron Ross Powell: So given that the AMA fought as hard as it did against government involvement, government takeover of the healthcare sector and they fought against Truman’s plans, and given how much political weight they seemed to have, how did we get to Medicare and Medicaid?
39:10 Christy Ford Chapin: So that’s a really interesting story, because the AMA and insurers are continuing their attempt to expand insurance to keep the federal government out. So the Medicaid… Medicare, excuse me, the Medicare debates really began back in the late ‘50s, ’57, I think it is that Congressman Forand offers a bill, and you even have Eisenhower offer a Medicare‐type bill as well, as a counter to this Democrat Congressman’s bill. So you have these ongoing talks about creating some type of insurance program for the elderly. In the 1960 presidential election, both Nixon and Kennedy are talking about their plans to create this insurance program for the elderly. It’s pretty much a bipartisan decision. And the reason is… Well, let’s go back to the insurers and the AMA, they’re even trying to cover the elderly, and they are going to such lengths to try to cover the elderly that they’re actually going to state legislatures petitioning for anti‐trust exemption, so that numerous insurance companies can get together, pool their resources, pool their administrative capacity and attempt to try to cover the elderly, even though they have this really expensive model.
40:29 Christy Ford Chapin: Now, the insurance they sell to the elderly, they really cannot offer them more than hospitalization, even though with all their other policies they’re trying to make a more generous for this political point of we can do it. But even with them pooling their resources and offering only pretty stripped down policies, they do get up to covering, believe it or not… I wish I could check the statistic too, but more than 50% of the elderly end up being covered before Medicare, but it’s still not enough because it’s such basic coverage and the insurance companies are actually losing money on these programs, so they’re having to take profits from their other underwriting lines, whether it’s life insurance or pension packages to underwrite the losses that they’re incurring on trying to cover the elderly. So as we’re getting into Medicare, a lot of insurance companies, particularly larger ones, are not very enthusiastic about opposing Medicare, ’cause they see it as a way to dump very expensive people to cover. Why do they want to continue covering them? Of course, the AMA is going full bore to oppose Medicare, just as they did with the Truman campaign.
41:42 Christy Ford Chapin: But they really run into a lot of problems because, at this point, businesses are favorable toward Medicare, so they don’t have to deal with retiree benefits. Certainly unions are and politicians, you have even Republican politicians showing up to talk to physicians or insurers and saying, “Look, if you can’t cover most of the elderly population with pretty generous insurance, we’re gonna create a program. If the market can’t handle it, we have no problem intervening here.” So what a lot of people don’t realize about Medicare, I think a lot of people know it passed on a bipartisan vote, but even the Republicans who didn’t vote for Medicare, most of it was because they were supporting a Medicare alternative plan. So it’s really the Kennedy‐Johnson administration plan that goes through, but there’s a political consensus about the need to create a program, because if there’s this idea that the market is… They expand health insurance from about, say, 1945 it’s covering about 25% of the population by the time they get up to 1965, it’s covering about 80% of the population.
42:49 Christy Ford Chapin: So they ran pretty quickly to cover people, but they really tripped up when they got to the very expensive elderly subscribers, so Medicare passes. But what’s also very significant about that program is these reformers and the Social Security Administration, who are working with the Congressman to design this bill, all along they have wanted to get rid of this insurance company model, that was one of things they wanted to do under Truman, not just introduce universal health care managed by the federal government, but they wanted to revert back, they wanted to favor non‐profit plans and also the prepaid doctor groups. But they realized by the time we get up to the 1960s that they can’t do that. The private sector has built up so much. There’s so much organizational capacity and growth in the private sector that the public sector is never gonna be able to match. The Social Security Administration realizes there’s no way we can handle covering, dealing with insurance and physicians in hospitals through the Social Security Administration. So another story of reluctantly, they are doing something reluctantly, they end up designing the Medicare program around the insurance company model.
44:04 Christy Ford Chapin: So, pretty much you have insurers acting as the administrators. Yes, they have to follow the rules of the program that the Social Security Administration sets out, but they administer the program, they’re the go‐betweens with the hospitals and the physicians. Payments, cost‐containment procedures, which they had started building up by the mid‐1950s and afterward, because as costs are shooting up and they’re getting a lot of bad press, the AMA and physicians have to reluctantly agree to let the insurance companies start putting in regulations to try to contain costs. There’s a lot of conflict around this, but it’s really building up by the 1960s. Physicians often have to go before utilization review committees that are looking at what they’re doing. Some insurers have to get permission before they put a patient into the hospital, their diagnoses are being scrutinized, treatment blueprints are being created, insurers are becoming experts in medicine themselves as they try to navigate different ways they can try to contain costs.
45:12 Christy Ford Chapin: So of course, federal officials are thinking, “We can’t do all of this from scratch, we’re gonna rely on insurance companies to deal with all of this,” all of the working with the hospitals and physicians, ’cause they’ve already set up all of these procedures and processes, and there’s no way we can do that from scratch and roll this plan out any time soon. And plus, it makes it more politically palatable because we’re offering this welfare program, which is very favorable to the middle class, right? Because this isn’t like a welfare program for the poor, this takes a burden off of even wealthy individuals, middle‐class individuals who don’t wanna spend money on mom and dad as they’re aging; instead, the idea is, “Okay, you can save money for your child’s education or piano lessons,” or whatever it may be. So you can see why it’s very politically popular. And then, federal officials can say, “And on top of that, it’s gonna be the exact same system that… The elderly are gonna use the exact same system that you got, everybody’s already familiar with.”
46:12 Trevor Burrus: That sounds familiar in the sense of, it sounds somewhat like the Affordable Care Act, the rhetoric around it. Obviously, Medicare and Medicaid were huge public programs in a different way, but the same idea that the only way we can reform healthcare is to keep the model that we have, keep the insurance model. So everything about, if you like your health insurance, you can keep it, I think that’s what President Obama felt like he kind of had to say, because that’s the thing that people are familiar with, and no one is thinking outside of that box, including with his last huge reform, with the Affordable Care Act.
46:50 Christy Ford Chapin: Absolutely, yeah, ’cause they realize that would generate so much opposition. So, of course, you might remember the attempt to undermine and get rid of the insurance company model. So, of course, the bottom line is the ACA is also [chuckle] built on the insurance company model, but they did try to undermine it with a public option. And you probably remember how a lot of Democrats and particularly progressive Democrats wanted to get that public option onto the exchanges with the idea that they could load it up with a lot of benefits, undercut the prices that private insurers could offer and then grow from there in order to destabilize this insurance company model. But of course, the public option doesn’t go in to the final legislation ’cause they wouldn’t be able to pass it, they wouldn’t be able to get all the Democrats on board. And so what we end up with is a program that’s built on this same fundamentally unsound, inefficient model that not only has all these costs problems, fragmented care, but you also are in a situation where the power situation has reversed in the healthcare system, where it’s no longer physicians calling the shots.
47:57 Christy Ford Chapin: Now it’s insurance companies calling the shots, because cost‐containment programs have built up so much over the decades that I would argue really it’s the insurance company deciding how medicine is practised, moreso even than physicians in a lot of cases. Because physicians have to follow standardized treatment blueprints or they won’t be compensated, so it takes a lot of the art out of medicine, because they’re tied to… You have to do it this way, and your patient might be a little different or respond to something different, but you have to do it the way the insurance company says. So right now, we have a situation where insurers aren’t just financing healthcare, they’re really at the center of everything, they’re managing Medicare, they’re in with ACA, and they’re supervising physicians in hospitals.
48:45 Trevor Burrus: And that seems pretty ironic because the AMA originally believed that insurance was the best way to avoid governmental control and third‐party control, and then it became the exact opposite.
48:57 Christy Ford Chapin: Exactly. [chuckle] This is a story of a lot of irony. So yeah, the very thing that AMA leaders were trying to prevent from happening in the 1930s, they ended up creating. They pushed all their chips on this one model and then this is what ended up happening. And of course the other irony being that the more federal policymakers, both Republican and Democrat, tried to get rid of this model, the more they embedded it into the system.
49:26 Trevor Burrus: So, the story of roads not taken, it now seems that having so gone deep into the insurance model, that we can’t go back to these prepaid systems or any of these things, or anyone who has tried has failed. That this road seems to lead more likely to single‐payer than it does to going backwards and reforming the insurance model, which has just proved to be almost impossible.
49:55 Christy Ford Chapin: Well, I’d like to be a little more optimistic. [chuckle]
50:00 Trevor Burrus: Okay.
50:00 Christy Ford Chapin: And this is my optimism. So, I’ll tell you a little anecdote. So I went on the first podcast after my book came out, I was asked to be on the Sam Seder Show, which as you might know, is very progressive, liberal progressive podcast and they wanted to talk to me about these prepaid doctor groups from the 1930s. And I thought this was very random, they figured out that I was an expert in them. But why did they wanna talk about this? So I go on and talk about it. And they’re interested in this idea, because it gets rid of the corporate power, it takes the corporate power out of the healthcare market. And then the host tells me, “I don’t like Sean Hannity, but where I found about this model is from Sean Hannity’s program.” So then I go over to Sean Hannity’s program, and I’m just so interested seeing both sides. And of course, on the other side, conservatives are interested in the program because of consumer choice and more physician autonomy and such. So to me it’s very interesting that there’s this bipartisan interest, and also the direct primary care model was mentioned as something that is trying to go back and recover this past.
51:12 Christy Ford Chapin: I think these are growing pretty quickly. They would grow a lot more quickly. One thing they have to do is they have to do a lot of lobbying at the state level to get a lot of the regulations that were passed in order to try to rein in costs for the insurance company model, they actually need to get those laws cleared away, to allow them to operate. So in some states, the AMA had things passing, you can’t have a corporate healthcare model. And also, for example, a lot of states passed laws saying doctors can’t dispense their own drugs, own their own labs and diagnostic centers, which makes sense under the insurance company model, because if you let doctors do that it gives them more things to run up the bill with, right?
51:56 Christy Ford Chapin: But it’s… Those laws are an impediment to the growth of the prepaid model coming back. But what we do see is we see some lobbying efforts at the state level. It looks like it’s moving along pretty well. At the federal level, the only thing they really need is for the federal government to allow people with health savings accounts, and keep in mind that almost 50% of employers offer health savings accounts now. The problem with health savings accounts is they don’t fundamentally change the structure of the system, but… So, health savings accounts allow you to buy one type of insurance. These groups are trying to convince the federal government to just change the rules so that you can purchase two types of insurance. You could purchase a this insurance directly from this direct primary group and then also purchase a catastrophic insurance policy. And these groups are seeing great things, with efficiently delivering care, prices coming down, they’re able to deliver medicine very, very cheaply compared to the model we have now, including prescription drugs and such, but it is different right now state‐to‐state based on what has been done at the state government level. And then, of course, holding out to see people with HSAs can start to choose these options as they are founded and created in their town.
53:18 Trevor Burrus: So it doesn’t have to end in single‐payer.
53:22 Christy Ford Chapin: No.
53:22 Trevor Burrus: Yeah, we can start growing these out. And as I mentioned before, we have a previous episode discussing the direct primary care model. So, possibly, if we grow this out, we can reverse this flow, but we also have Medicare For All. Everyone is saying Medicare For All, and that force is going in that direction too.
53:41 Christy Ford Chapin: Yeah, but the irony of that is you have progressive Democrats, like you can’t bring a corporate power‐based system. Now of course they’ll tell you, “Well, we’re gonna get rid of the insurance companies,” if they think that far. I don’t… I think a lot of them haven’t even… But they’ll pay… “It doesn’t matter, you still have the same model.” Okay, so now you’re gonna have to government acting in that same position, we have seen that this model is broken. Why for the love of Pete would you wanna expand it and embrace it? If you wanna go universal health care, there are ways to do it and Medicare For All is not that way, because it’s gonna create such a massively inefficient system. If you’re gonna go universal care it has to… We need to think about the structure of the market, it is so important the way people are incentivized, you can’t just act like incentives don’t matter.
54:34 Aaron Ross Powell: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoyed today’s show, please rate and review us on iTunes, and if you’d like to learn more about libertarianism, find us on the web at www.libertarianism.org.