The Untold Story Behind Rising Medical Costs

Many solutions are offered for rising medical costs. Almost all of them involve more government intervention and less consumer choice. No one seems to talk about the root cause of rising costs—the extraordinary power of the American Medical Association (AMA) to control the supply of doctors.

Last week I had an appointment with my dermatologist. He has had a distinguished career. Last year he gave up his practice to devote full time to training dermatology residents at a major teaching hospital. He sees former patients one day a week.

He told me that although he is willing to essentially give away his former practice, in over a year, he has not found an interested physician. This was puzzling and disturbing to him. He had a very large practice in a fast-growing suburb that he had built over many years. I didn’t ask him what his annual income was from that practice, but I imagine it was substantial.

But apparently it is not substantial enough to attract a physician willing to take it over. He explained to me that in his current crop of dermatology residents, not one was interested in beginning a general dermatology practice. They were more interested in more lucrative forms of practice, such as cosmetic surgery.

As an economist, the facts that there are no takers at all for his practice and apparently little interest in general dermatology among new physicians tell me one of two things. Either there is no longer a demand from patients for general dermatology or there is a shortage of doctors. Since the former is not true, the latter must be. There are simply too few dermatologists to fill the comparably lowly financial slots of general dermatology.

An economic principle is that when there is a shortage, prices go up. Ordinarily—in a free-market—when there is more demand than supply, new entry by suppliers occurs. However, the supply of physicians is strictly controlled.

How did this shortage of doctors come about? In 1910 the AMA, with the backing of the Carnegie Foundation, commissioned Abraham Flexner, himself not a physician, scientist, or medical educator, to inspect medical schools. Although some inspections took only an afternoon, the Flexner report convinced state legislatures that only graduates of AMA approved medical schools should be licensed to practice medicine. By exercising its power to certify schools, the AMA reduced the number of medical schools in this country from 160 to 76.

Suppose there was an American Grocers Association that was granted power to regulate how many supermarkets opened up in each town and city. What do you think would happen? That Association would argue that in order to ensure high quality, the number of supermarkets should be reduced. They would mount a vigorous campaign to convince the public that the reduction in the number of stores was to protect the public.

But we know what would happen! If the supply of supermarkets was reduced and entry to open a new supermarket was made difficult, prices would go up, and quality would go down. Consumers would have to drive farther to get to a supermarket, there would be fewer 24/7 supermarkets open, product selection would be reduced, and innovation would occur at a much slower rate.

And so it is with medical care. No political party wants to tackle the unbridled power of the AMA—they are just too powerful a lobby. Until this power of the AMA is tackled, there will be no solution to rising medical costs. And as a consequence, the movement towards further socialization of medicine, which will hurt the consumer even more, will accelerate.