Editor’s note: This article, originally published in the August 23, 1993 issue of Fortune, details the Clinton administration’s attempt to bring health coverage to millions of uninsured Americans.
Reporter Associate: Rosalind Klein Berlin
Policymakers have long argued that medicine is a market unto itself, governed by laws as strange as those of Lewis Carroll’s Wonderland or Jonathan Swift’s Lilliput. In fact, the forces driving up health care costs are surprisingly mundane: soaring demand and scarce supply. President Clinton’s well- intentioned changes, to be announced sometime this fall, seem certain to make the imbalance worse. Granting benefits to 37 million uninsured Americans will raise demand for everything from annual checkups to knee surgery. To absorb the new business and spur competition, the supply of doctors, nurses, and laboratories needs to expand — swiftly. In today’s overregulated marketplace, that’s impossible.
The Clinton plan risks flunking Economics 101. If services don’t grow, costs will explode, forcing the government to impose price controls. Then the market will face the same chronic shortages that plague state-run systems in Canada or Britain. Patients will either wait months for a hysterectomy or prostate surgery, or skip the queues by buying elite, high-priced insurance. Says Harry Markowitz, a Nobel Prize-winning economist at Baruch College in New York City: ”In all of Clintonomics, the biggest danger is increasing medical spending without doing anything to increase the supply.” The doctor market resembles a medieval guild that limits its members and protects itself with monopoly work rules. Most damaging are the restrictions on labor, which accounts for well over half the $940 billion a year the U.S. spends on health care. Protectionist immigration laws impede foreign-born doctors from practicing in America. A bewildering patchwork of state labor laws prevents nurses from fully competing with doctors. And in some states, regulations block construction of low-cost hospitals and diagnostic centers.
The Clinton plan probably won’t touch most of these market-mangling practices. Despite a dire shortage of many types of doctors, the task force headed by Hillary Rodham Clinton has said nothing about loosening immigration laws or otherwise increasing the total supply of physicians; the President is even considering a plan that would shrink the number of doctors. Congress is mulling antitrust exemptions so that hospitals and laboratories could collaborate to decide how many beds or cardiac catheterization centers are needed in a community — an open invitation to price-fixing. The only bright spot is the task force’s goal of giving nurses more scope to compete with physicians.
By ignoring or increasing anticompetitive practices, the Administration could undermine managed competition, the foundation of its health care plan. Under managed competition, the 37 million uninsured Americans — chiefly the working poor, many of whom earn too much to qualify for Medicaid but not enough to afford private insurance — would buy health care through state or regional health insurance purchasing cooperatives (HIPCs). The HIPCs would contract with competing networks of doctors and hospitals, called accountable health plans (AHPs), that resemble today’s health maintenance organizations.
In theory, the AHPs would battle for market share by offering low prices and showing superior results in surgery and other procedures. In practice, there aren’t enough doctors, especially generalists, to make this strategy work. HIPCs can’t push down prices unless the market is crowded with AHPs and HMOs hungry for business. A shortage of doctors, hospitals, or laboratories would cut the number of providers bidding for customers and keep new HMOs from entering the market.
How do we know there won’t be enough providers to stimulate competition? Because shortages are restricting competition right now, before the Clinton plan swells demand. Thousands of medical practices are too busy to take new patients. The nursing corps is stretched to the limit. Says Douglas Freeman, CEO of the Medical Benefits Mutual Life insurance company: ”The theory that we can ratchet down cost by exchanging volume for lower prices is flawed for a basic reason. The providers are already busy as hell.”
The best way to cure what ails health care is to unleash the free market. The market does work. Prices are already falling dramatically in large cities where an ample supply of doctors are competing hard for business. HMOs in Los Angeles and Miami have chopped fees for specialists anywhere from 10% to 40%. In most parts of the country, however, lucrative jobs miraculously outnumber scarce physicians. White-collar America is wrestling with layoffs and pay cuts, but does anyone know an unemployed doctor? On average, physicians earned $171,000 in 1991, 43% more than in 1986.
To attract new doctors, group practices and HMOs seek help from medical recruiters, who charge up to $25,000 per placement. Two-thirds of all residents receive 50 or more letters or phone calls from potential employers, according to a study by Merritt Hawkins & Associates, a Dallas recruiting firm. In the past five years the number of headhunters has doubled to 1,000, or one for every 24 graduates of residency programs. Contrary to widespread perception, the clamor isn’t just for primary-care physicians. Susan Cejka, president of her own recruiting firm in St. Louis, estimates that there are more than three job openings for every graduating cardiologist and orthopedist.
The view that the doctor shortage will get worse — and that the free market, not the government, should determine the supply — is highly unconventional. Many politicians and health care economists believe America has at least enough doctors, and probably too many. Standing economic reality on its head, they argue that strictly limiting the supply is essential to holding down costs. Controls are necessary, the argument goes, because fee- for-service medicine has distorted the marketplace, allowing physicians to create demand for their own services. Under fee for service, the more visits, tests, and procedures a doctor commands, the more he or she earns. Patients seldom resist, since Medicare or their employers pay most of the bill.
In this artificial market, increasing the supply of doctors will only multiply the number of procedures. ”By their very presence, physicians induce demand,” says Dr. Marc Rivo, a family physician in the Department of Health and Human Services who advises Congress on physician supply. He believes that if the incentives to perform unnecessary tests and procedures under fee for service disappeared, the U.S. would have a substantial surplus of doctors.
As managed care replaces traditional fee for service, says Rivo, Americans will need more primary-care doctors but far fewer specialists. Today 41 million Americans are enrolled in HMOs, which employ doctors on salary or contract with physicians to treat patients for a fixed monthly fee. HMOs encourage their primary-care physicians to treat rashes, sprains, chest pain, and all other routine disorders themselves, sending patients to specialists only for surgery or complex diagnoses and treatment. By contrast, in fee-for- service medicine, patients can see any doctor they choose, including specialists; many think nothing of visiting a cardiologist for routine chest pain, even though most chest pain isn’t caused by heart problems.
To prepare for managed care, government officials are considering extraordinary national work-force plans for physicians. Unveiled in 1992, they are the work of two prestigious committees that advise Congress and the Department of Health and Human Services on physician supply and Medicare: the Council on Graduate Medical Education and the Physician Payment Review Commission.
The committees would put a tourniquet on residency positions, the main artery for new physicians. This year 24,000 doctors will enter residency programs in hospitals and clinics. Under the manpower plans, the first-year residency rolls would drop by 5,000. Medicare, which now pays $5 billion a year to support residency programs, would decline to fund any new slots.
More primary-care doctors would be trained, but specialists would get the scalpel. A new federal commission would set strict yearly quotas for every category of doctor, from neurosurgeon to pediatrician. Under the COGME proposal, the number of primary-care residents would increase by more than 20%. The number of graduating orthopedists, dermatologists, radiologists, and other specialists would shrink by at least 40%.
With the market desperate for doctors, why impose quotas? Once managed care is in place, there will be no reason to fear more doctors. Physicians on salary have no incentive to create demand. Fee-for-service physicians who generate expensive, sometimes unnecessary procedures will increasingly lose business to efficient HMOs.
Demand for doctors’ services stands to rise sharply later in the 1990s, driven by an aging population, new high-tech procedures, and an influx of previously uninsured patients. The Health Care Financing Administration predicts that inflation-adjusted spending on physician services will surge from $152 billion in 1992 to $257 billion by the year 2000, or 69%. In the same period the number of practicing doctors will rise to just under 600,000, or 11%. As a consequence, gross revenues per doctor will soar from $284,000 to $432,000. The result: Physicians will be even busier than they are today, putting intense pressure on prices.
The doctor drought in rural America could become a plague. More than 150 counties lack a single doctor. The wheat farming town of Cherokee, Oklahoma (pop. 1,787), had to close the only hospital in the county in January when one of its two doctors moved away. Finding a replacement is an expensive, exhausting civic project. The town fathers have hired a headhunter, and local citizens have formed the Alfalfa County Medical Foundation to offer candidates a guaranteed income of $120,000 to $160,000 a year. The foundation will also pay for malpractice insurance, as well as a year’s rental on the new doctor’s clinic. Recruiter Cejka estimates that there are 10,000 open jobs for every 2,200 yearly graduates in family practice.
In small and medium-size cities, the doctor shortage can block new HMOs from entering the market to challenge fee-for-service plans or other HMOs. PCA, an HMO in Austin, Texas, has had trouble expanding in Waco and other central Texas towns because many overbooked primary-care doctors won’t take new patients. Those who will are hardly desperate for business. The dearth of doctors inhibits PCA from imposing controls on expensive tests and lengths of hospital stays. ”They simply don’t need our business enough to agree to controls,” says Donald Gessler, president of PCA.
Worse, the practices still taking patients are sometimes miles from communities where a company’s employees work and live. ”Employers have turned us down because we can’t offer physicians in their area,” says Gessler. He thinks the region is big enough to support three competing HMOs. Even in some big cities, the lack of generalists is restraining the growth of managed care. For example, Aetna has found that many practices are too busy to take its new patients in Atlanta.
As for specialists, demographic and technological developments argue in favor of more, not fewer, of them. A large portion of specialty care goes to the elderly, a market HMOs have just begun to tap because most Medicare patients now have the right to visit fee-for-service doctors. The Clinton plan ultimately would shift the elderly into managed-care plans; that in turn would force HMOs to recruit more specialists, according to Daniel Mendelson of Lewin-VHI, a Virginia health care consulting firm. By the year 2025 the number of people over 65 will increase by 88%, to 62 million. Advances in medical technology are also generating demand for specialty care. Patients with hernias and gallstones can now avoid major surgery by choosing laparoscopy, a technique in which a thin tube equipped with a laser or an electrical cutting device is inserted through a tiny incision.
There’s no question that HMOs deliver specialty care more efficiently than fee-for-service doctors. For example, to treat accelerated heart rate, primary-care physicians in an HMO often advise patients to drink less coffee or stop smoking. Those simple measures are lowering the number of expensive tests performed by cardiologists. At Park Nicollet Medical Center, a 365- doctor practice in Minneapolis that contracts with a large local HMO for 60% of its business, gastroenterologists used to perform all the sigmoidoscopies — tests for colon cancer done with a flexible scope. Now medical technicians do some of them. Within six months the technicians will perform all of the routine tests; a single gastroenterologist will be on hand to supervise and monitor the results.
As medicine finds ingenious ways to improve their lives, consumers will covet more, not less, specialty care. HMOs that bar patients from the high- tech procedures they need, or even think they need, will lose business. % ”We have to be careful not just to avoid waste but to provide enough specialty care,” says Gene P. Guselli, chief executive of Private Healthcare Systems, a managed-care company based in Lexington, Massachusetts. PHCS and other providers offer a popular option that allows members to visit specialists directly. They pay somewhat higher fees than patients who must first see a gatekeeper.
Today specialists are scarce in towns and smaller cities. In Ridgecrest, California, a picturesque town of 28,000 abutting the Sierra Nevada, the local group practice of 18 doctors has been trying to recruit an orthopedist and a urologist for three years. The $150,000 starting salary is barely attracting candidates to visit their up-to-date clinic.
Generous pay can’t begin to lure specialists to a place like Fitchburg, a faded blue-collar town in northern Massachusetts. Exhausted by his 70-hour workweeks, orthopedist George Lewinnek is seeking a partner to share the load. Though he’s offering $125,000 to start — rising to as much as $350,000 in two years — most candidates won’t return his phone calls. What does he think of a manpower policy that would limit the number of orthopedists? ”At the risk of seeming lighthearted, it has to be good news for my financial future,” says Lewinnek. ”Hillary is pulling up the gangplank, and I’m a lucky one on the ship.”
To ease its shortage, the U.S. should do two things: Train more American physicians and import more foreign ones. Almost all foreign-educated doctors practicing in the U.S. are as qualified as American physicians. They must pass rigorous admissions tests to get into U.S. residency programs, where they then spend three to four years learning U.S. medicine. Even so, a 1976 law requires graduating foreign residents to return home for two years before applying for a permanent U.S. visa. Though many residents marry Americans or obtain exceptions for practicing in rural towns, about one-quarter of today’s 18,000 foreign graduates must leave.
Immigration laws also hold back Canadian doctors willing to work in small- town America. Forty-one U.S. states grant Canadian doctors the right to practice. The hitch is that, unlike architects or engineers, Canadian physicians need a permanent residency permit to emigrate. That requires up to 15 months of tortuous, expensive immigration paperwork.
Another way to stretch the supply is to eliminate restrictions on nurses. A corps of 100,000 advanced practice nurses are specially trained to administer anesthetics, serve as midwives, and provide primary care. Nurse practitioners (those trained to offer primary care) can do Pap smears, conduct physical examinations, and prescribe drugs. However, most states, including New York, New Jersey, Ohio, and California, bar nurses from practicing independently. They must work either directly for a physician or under a doctor’s supervision. Even when nurses work for doctors, their freedom is often limited. Twenty states forbid nurse midwives to deliver babies.
State by state, nursing groups have begun to peel away restrictions. The HMOs are big beneficiaries. After Massachusetts passed a law allowing midwives to deliver babies, Harvard Community Health Plan, a New England HMO, hired 25 midwives, who now perform more than 15% of its deliveries. The midwives earn about $70,000 a year, vs. an average of $225,000 for HCHP’s 72 obstetricians.
In Arizona, Alaska, and five other states, nurses are permitted to own and operate medical clinics. Carondelet Nursing Network in Tucson operates 17 primary-care clinics and provides home care for the chronically ill. Carondelet’s nurse practitioners do physical exams, order lab tests, and write prescriptions for 6,000 patients. They have contracts with three HMOs. In a pilot program, Medicare is experimenting with allowing Carondelet nurses to act as gatekeepers for patients lacking a primary-care physician. Says Phyllis Ethridge, an advanced-practice nurse who directs the clinics: ”Many of the doctors’ local practices are extremely busy. At our centers patients can be seen and monitored immediately without an appointment.”
To its credit, the Clinton task force promises to broaden the role of nurses. The American Nurses Association is pressing the President to propose legislation that would allow nurses to practice independently in all 50 states. The American Medical Association vehemently opposes them, and a bloody turf war seems likely.
In contrast to the static market for doctors and nurses, competition is boiling in the hospital and medical equipment business. During the deregulation wave of the 1980s, most states eliminated ”certificate of need” regulations that compelled hospitals and companies to get special licenses to build new hospitals or diagnostic laboratories. At the same time, the demand for beds in many areas stagnated or declined as procedures that once required hospital stays — like cataract or knee surgery — evolved and could be done on an outpatient basis. On average, one-third of America’s hospital beds remain empty. Although patient demand is growing for diagnostic services such as magnetic resonance imaging (MRI), supply has grown even faster, a refreshing rarity in the medical marketplace. Since 1989 the availability of MRIs has forced down the average price of a scan for torn cartilage from $1,200 to $650.
In California deregulation has led to the creation of 119 centers that do heart bypass surgery. The combination of big managed-care companies and a multitude of surgery centers vying for their business has triggered severe price competition. The Kay Group, a team of ten heart, lung, and vascular surgeons at Good Samaritan Hospital in Los Angeles, performs bypass surgery for $6,000 to $15,000, depending on the complexity of the operation — about the same prices as in 1982.
Lately hospitals have begun demanding protection from increased competition on the dubious theory that increasing the supply drives up prices. Last year Minnesota and Wisconsin reinstated restrictions on the construction of hospitals and the purchase of expensive medical equipment. The American Hospital Association is lobbying Congress for an antitrust exemption that would allow hospitals to allocate services. ”Three or four hospitals in a town could get together and assign heart bypass or catheterization to a single clinic,” says Robert Bloch, former head of antitrust enforcement in medical care for the Justice Department. ”That could establish local monopolies and push up prices.”
The fiction that the medical market defies economic gravity has enabled doctors and hospitals to maintain monopolistic practices that would be denounced in any other industry. The legacy of soaring prices and short-handed service proves that medicine isn’t really different after all.
