The American Medical Association (AMA) had already been formed in 1847 by Nathan Smith Davis. Davis had been working at the Medical Society of New York with issues of licensing and education. While the pretense was always more rigorous standards toward the supposed end of effective treatments, exclusion was the reality. Hence it was no surprise that in 1870, Davis worked successfully to prohibit female and black physicians from becoming members of the AMA.10
The AMA formed its Council on Medical Education in 1904 as a tool to artificially restrict education.11 However, the AMA's conflict of interest was too obvious. This is where Abraham Flexner and the Carnegie Foundation entered the picture. Flexner's older brother Simon was the director of the Rockefeller Institute for Medical Research and he recommended his brother Abraham for the Carnegie job. Abraham's acceptance of the role was the perfect special-interest symbiosis. Carnegie's desire was to advance secularism through higher education, thus it saw the AMA's agenda as favorable toward that end. Rockefeller's benefactors were allied with allopathic drug companies and hated for-profit schools that couldn't be controlled by the big-business, state-influenced foundations. Last of all, the AMA got an objective-appearing front in Carnegie.12
Not only was Abraham Flexner not even an allopathic physician; he was not a widely known authority on education,13 never mind medical education, as he had never even seen the inside of a medical school before joining Carnegie. His report was already effectively written, since it was essentially the AMA's unpublished 1906 report on US medical schools. Furthermore, Flexner was accompanied on his inspection by the AMA's N.P. Colwell to insure the inspection would arrive at the preordained conclusions. Flexner then spent time at the AMA's Chicago headquarters preparing what portion of the final product was his actual work.14
Regardless of these scandalous circumstances, state medical boards and legislatures used the report as a basis for closing medical schools. Around the time of Flexner, there was a high of a 166 medical schools; by the 1940s there were just 77 — a 54 percent reduction.15 Most small rural schools were closed, and only two African-American schools were allowed to remain open.16 By 1963, despite advances in technology and a huge growth in demand, one effect of the report was to keep the number of doctors per 100,000 people in the United States — 146 — at the same level it was at in 1910.17 Of the approximately 375,000 physicians in practice in 1977, only about 6,300 or 1.7% were African-American.18
While physician incomes and prestige dramatically increased, so did the caregiving workload. Wolinsky and Brune (1994) report that doctors were firmly in the lower middle class at the time of the AMA's founding and made about $600 per year. This rose to about $1,000 around 1900. After Flexner, incomes began to skyrocket such that a 1928 AMA study found average annual incomes reached a whopping (for the time) $6,354.19 Even during the Great Depression, physicians earned four times what average workers did.20 A 2009 survey put family-practice doctors (on the low end of the physician income range) at a median of $197,655 and spine surgeons (at the high end) at a median of $641,728.21 These figures are mind boggling to ordinary Americans, even in good economic times. In addition, the cyclical unemployment that throws workers out of jobs in almost all other industries with the arrival of recessions or depressions became nonexistent among physicians after Flexner.
However, not even Flexner could repeal the laws of economics: the physician workload in certain areas became backbreaking to impossible, such that some physicians no longer accept new patients. Some primary-care physicians today are booked solid for at least two months, and unless you have some sort of connection to get in before that or pay for concierge care, your alternative for urgent care is the same as everyone else's on a weekend: the emergency room where you'll wait for hours, or a walk-in where you'll see one or two MD names posted on the building, but wait for hours for a nurse practitioner.
Of course it wouldn't make sense to restrict physician services without restricting hospitals. For-profits were the first to go, and where they were not outright prohibited, they faced a number of regulatory burdens that nonprofits escaped — such as income and property taxes. Nonprofits received generous government subsidies, tax-deductible contributions, and local planning agencies working in their favor to keep for-profit competitors from expanding. This state-sponsored discrimination against for-profit hospitals took its toll: at the time of Flexner, almost 60 percent of all US hospitals were for-profit institutions. By 1968, only 11 percent were for-profit institutions with about an 8-percent share of hospital admissions.22
Eliminating most for-profit medical schools and hospitals made sense for the AMA and the rest of organized mainstream medicine, since they were controlled by owners or shareholders who had the incentive to control costs in order to maximize profits. Nonprofits were free to pursue the political goals that organized mainstream medicine favored, especially the goal of a much more lengthy and costly education, which served as another barrier of entry to the profession. (Especially amusing was a 2004 article by two Dartmouth physicians arguing for maintaining restricted entry because of high costs.23)
The Rise of Health "Insurance"
In the early 1900s, prepaid health plans were created for the timber and mining workers of Oregon and Washington to help offset the inherent risks of those industries. Within a free-market, for-profit insurance system, claims were closely monitored by adjusters. Fees, procedures, and exceptionally long hospital stays were monitored and subject to challenge. A physicians' group in Oregon that resented this type of scrutiny created a plan where procedures were reimbursed and fees paid with few questions asked. Plans with similar structures began dominating the market in other locations because of government-provided advantages.
By 1939 these loose-cost containment plans began to be marketed under the Blue Shield name. That same year, Blue Cross was endorsed by the American Hospital Association. Already in existence for ten years, Blue Cross had begun as a hospital insurance plan for Dallas school teachers that allowed them to pay for up to three weeks of hospital care with low monthly payments.
After this, organized mainstream medicine waged an intense war on non-Blue plans. Goodman (1980) contends that some physicians lost hospital privileges and even their licenses for accepting non-Blue plans.24 The Blues also gained government-supplied advantages not available to non-Blue plans. In many states, they paid no or low premium taxes and sometimes no real-estate taxes. They also weren't required to maintain minimum benefit/premium ratios and could have no or low required reserves. With government advantages, the Blues steadily came to dominate the industry. By 1950, Blue Cross held 49 percent of the hospital insurance market, while Blue Shield held 52 percent of the market for standard medical insurance.25 They merged in 1982 and today cover one of every three Americans.26
Blues-created "insurance" was anything but true insurance.
Hospitals were paid on a cost-plus basis. Insurers paid not a sum of prices charged to patients for services but artificial "costs" that bore no necessary relationship to the prices of services performed.
Insurance of routine procedures. This converted insurance to prepaid consumption that encouraged overuse of services.
Insurance premiums based on "community rating." The word "community" meant that every person in a specific geographic area regardless of age, habits, occupation, race, or sex was charged the same premium. For example, the average 60-year-old incurs four times the medical expense of the average 25-year-old, but under community rating both pay the same premium (i.e., young people are overcharged and the elderly undercharged).
A "pay-as-you-go" system. Unlike genuine catastrophic hospital insurance that placed premiums in growing reserves to pay claims, the new Blues' "insurance" collected premiums that only covered expected costs over the following year. If a large group of policyholders became ill over several years, the premiums of all policyholders had to be raised to cover the increase in costs.
These traits spell cost-explosion disaster, so naturally they were incorporated into the federal government's Medicare and Medicaid programs when they were created in the mid-1960s to address the problem of healthcare being unaffordable for the poor and elderly — a problem the state and federal governments created!