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For a very long time people in the professional practice of medicine have both subtly and openly resisted changes that would cut into their own profitability and share of the “market.” This is natural. But medical professionals have a particularly useful tool to make their case to the public and to legislators — the health and well-being of the American people. I would have no similar advantage. Imagine me asking Congress to make it really hard to permit foreign economists to come to the United States and teach in Universities (in case any of you are checking, about 50% of the faculty in my department are native to countries outside the United States) on the grounds that allowing a Professor trained in Australia to come here would cause long-term damage to students, and that we’d have no way of knowing what that Australian professor was capable of doing to students.

Well such arguments are made all the time in the medical profession. In current times we see extremely aggressive campaigns against foreign doctors practicing in the US (it is very costly for foreign doctors to establish a practice here), we are seeing pushback against the training of American students at non-American medical institutions, we are seeing extremely aggressive pushback against further specialization in medicine by allowing the practice of various aspects of the profession to be done by people without MDs, and more. We’ll illustrate these with examples in the coming months.

For now, I’d like to share with you a little of the history of the antagonism the medical profession had with the Mutual Aid and Fraternal Societies that flourished in America in the latter half of the 19th century and early half of the 20th century. These mutual aid societies often specialized in offering members funeral benefits, life insurance, and eventually evolved to offering various forms of health insurance to their members. Naturally, the type of health insurance that became popular was a “catastrophic plan” (yes, the very plans being regulated out of existence by ObamaCare seem to have evolved naturally out of normal market processes). Early programs included the one by the Security Benefit Association which ran its own hospital, but allowed admission to the hospital only for surgical cases and for those cases involving “acute non-contagious diseases (there were rest homes for people with contagious diseases). SBA patients did not receive coverage for basic medicine and every procedure under the sun, but in exchange they paid very low fees and received full coverage for serious medical incidents.

As the success of the SBA hospital and insurance plan grew, it of course it attracted the negative attention of the practitioners of organized medicine. For example, staff doctors from the SBA hospital were blackballed from gaining admission to professional organizations such as the American College of Surgeons (more in a future post on how common this practice was for doctors outside of hospitals). And despite the fact that the state medical inspectors gave high marks to the quality of the SBA hospital, the American College of Surgeons refused to include the hospital in their approved lists of medical, surgical and hospital associations.

The reason: the American Medical Association did not like the way the SBA hospital attracted and contracted with doctors. Rather than the (expensive) fee-for-service preference of the AMA, the SBA hired doctors on fixed contracts and not including the SBA hospital on their list of approved facilities was another way for the AMA to punish them for this dastardly practice (which was extremely popular with consumers).

For years, the Council on Medical Education and Hospitals of the AMA continued to deny the SBA hospital inclusion on such lists citing rules against advertising and the corporate practice of medicine. When the SBA asked the AMA to provide examples of how they had violated AMA rules – no examples were forthcoming; and when the SBA made requests to the AMA for suggestions on how they could be in compliance with the rules, the AMA continued to ignore the SBA because the SBA hospital (a low cost, non-profit hospital for SBA members) competed with hospitals and physicians in communities it drew its patients from.

So, the SBA offers catastrophic insurance run through its own non-profit hospitals. Then the medical associations blacklist the doctors who contracted with the SBA and the hospital that they use. What’s next? Some good fortune. With the support of organized hospitals and doctors Blue Cross (to stabilize income hospitals received from patients) and Blue Shield (to stabilize income physicians received from patients) were formed as group insurance plans. These stood in stark contrast to the individual plans offered by the Fraternal Societies. When the Revenue Act of 1942 was passed in the midst of WWII price and wage controls, it was a huge blow to the Fraternal Societies. The Revenue Act permitted fringe benefits to be exempt from the income tax, and thus when firms offered group insurance to their workers, the workers did not have to claim these benefits as taxable income. However, if that same worker instead used his Fraternal Society to secure medical benefits as an individual, he had to do so with after-tax income – the individual insurance plans were not given the same treatment by the tax law (of course, this ridiculous change was NOT addressed in the ObamaCare law, which was passed in order to get more people access to care, at least that is what we were sold on).

The SBA and the SBA hospital suffered a great deal in the aftermath of these changes and the concurrent growth of Blue Cross and Blue Shield. The final nail in the coffin for the individual contracting of low-cost, effective catastrophic health insurance through private, voluntary, non-profit, non-commercial organizations came when the Nebraska Insurance Commission threatened to revoke the SBA’s license to operate on the grounds that it was no longer operating like a “fraternal society.”

Well of course. As David Beito reminds us in his book, while many people did indeed find the “fraternal” part of the fraternal societies as an attraction, it was far from being a major reason for the growth of such places. They became popular precisely because of economic considerations — the provision of mutual aid and insurance in times of need, and that provision uniquely came from people like themselves, not from unseen third parties nor from rich sugar daddies taking care of the unwashed masses. So when organized forces reduce the attraction of the “commercial” side of the operations of course the fraternal attraction would wane too (the advance of modern entertainment and other forms of association are also very responsible too).

In face of this threat, the SBA board decided that it would convert itself to a commercial mutual insurance company. The hospital closed soon thereafter.

There are myriad examples of how the Fraternal Societies provided medical benefits to members for very low cost and with reasonably good outcomes. The above story is not unique. It demonstrates that for nearly a century, organized medicine, ultimately in concert with government policy, has systematically resisted any efforts by freely associating individuals and organizations to offer low-cost medical services. These examples ought to serve as a reminder to people who argue that, “markets work great and all, but voluntary association could never provide medical services to individuals.” They did. And they were extinguished in no small part due to misguided government policy and the direct efforts of the medical cartel to make sure they did not flourish and evolve.

Would such mutual aid work today in the delivery of modern, high-tech medicine? There are reasons to be skeptical, but we’ll never know since we’ll never be able to see that “experiment” run.

2 Responses to “The Organized Medicine Cartel: A Love Story”

  1. Michael says:

    Very interesting, knew only a few of the stories. If I had to guess, the AMA is probably more successful as a cartel (or union) than the Bar Association for lawyers.

  2. Harry says:

    You make good points, Wintercow.

    Our present acute care system is so socialized and, naturally, screwed up. While the AMA, which does not represent nor control all doctors, has its hand in the promotion of socialized medicine, I find it hard to believe they have had OPEC-style influence over the supply of trained doctors.

    Saturday night I’m having dinner with two doctor friends, one an Orthopaedist who does hips and knees all day, the other a GP who owns his practice. I will report back their observations.

Leave a Reply to Harry