Medical Practice Today: How Did We Get Here? (Part I)

John R. Hilsabeck, MD, FACS
Article Type: 
Feature Article
Summer 1996
Volume Number: 
Issue Number: 

It has been said that families go “from overalls to overalls in three generations.” It has taken doctors a little longer than that. During the time of the Romans, doctors were of the slave class. At the time of the Industrial Revolution, as portrayed in George Eliot’s novel Middlemarch, doctors took their orders from the bankers and town councils. How far are we from that today? We are being referred to now, not as doctors, but as “health care providers,” a classification which also includes bedpan salesmen. Are we going to allow the present slide to continue until we finally reach the point where we are back to being slaves?

We are in a conflict with forces which are making a concerted effort to eliminate the practice of medicine as we have known it. A Chinese general said that to win a war, you must know the enemy. If we are to defend ourselves in this war, we must realize and admit that we have very real enemies and we must identify them. In Part I of this article, I will discuss three of them.

Non-profit Hospitals/ Hospital Administrators

The first enemy, and probably the closest to home, is the non-profit hospital which is run by a hospital administrator. If there is any doubt about the power of  hospital administrators over doctors, I refer you to the recent article by reporter Dan Rowan in The Washington Post, entitled “The ‘managed care’ bandwagon is running traditional practices off the road.”(1) The story of what happened to a group of doctors in Springfield, Missouri, typifies what is happening in Southern California and, increasingly, all over the country.

St. John’s Regional Health Center is a 736-bed, non-profit hospital and is part of a chain of hospitals operated by the St. Louis-based Sisters of Mercy Health System. Last fall, the hospital wanted to buy out the practice of dozens of local physicians to start a managed care network. Doctors who did not work for the hospital would face an uncertain future, and they were given until August 1st to decide whether to sell the hospital their practices, medical records, patient lists, and office assets. Although offered generous signing bonuses and other benefits if they sold their practices and became employees of the hospital, doctors faced penalties of $1,000 per day if they quit and practiced medicine within 25 miles of Springfield, within two years.

According to Rowan,(1) Cox Health Systems, the other non-profit Springfield hospital, is also trying to get control over doctors. It could be difficult for doctors to remain independent of Cox or St. John’s. The two medical centers control most of the medical office space in Springfield, and a group of senior physicians on the St. John’s staff decided not to form their own independent network when told by St. John’s hospital officials “ decide which side they were on....” These physicians were all longtime supporters of St. John’s. St. John’s Regional Health Center generated a surplus of $25.6 million and had $228 million net assets in 1993, $95.4 million of which was invested in securities. President and CEO James W. Swift received $298,500 annual compensation, exclusive of pension contributions, golden parachutes, and possible stock options in profit-making corporations operated by the non-profit hospital.(1)

In a move generally unnoticed by the public, the IRS ruled in 1981 that a non-profit hospital in California would not lose its tax-exempt status if it undertook various profit-making ventures such as medical office buildings, shopping centers, and restaurants.(2) The only condition was that the tax-exempt organization be kept separate from the taxable organizations. Non-profit hospitals and their administrators were quick to take advantage of this ruling.

The generous Medicare and other third-party payments to non-profit hospitals resulted in revenues similar to those of St. John’s as early as 1982. In a 1985 article about the non-profit St. Joseph Health System, California’s fifth largest hospital chain in terms of revenue, Hanley reported in the Los Angeles Times that revenues increased from $284.(2) million in 1982 to $396.6 million in 1985, the net income from $16.7 to $40.7 million in 1985, and the retained earnings in 1985 grew to $209 million from $166.3 million in 1984.(3) The chain of nine hospitals underwent extensive reorganization in 1981 and acquired Health Plan of America, an HMO, in 1984. This diversification was needed to protect the system from unpleasant shifts in market conditions, according to their consultant Paul Ellwood, founder of Interstudy, a health-policy research group based in Excelsior, Minnesota.

Driven by medical discoveries in the late 19th and early 20th century, particularly in asepsis, antisepsis, and anesthesia, and the advent of skilled nursing, surgical successes rapidly escalated and American hospitals quickly changed from simple almshouses and chronic care facilities to more complex acute care units. Operation of each hospital or small chain of hospitals was now more complicated and time-consuming. Neither the Board of Trustees nor the doctors had or took the time needed to run a business besides their own, and hospital operations were turned over more and more to hospital superintendents, later called “administrators.” The vacuum was filled. European administrators never achieved the same power. Most European hospitals were centrally controlled by government, and the chiefs of services were full-time, powerful, and managed their own departments and staff.(2) Administrators’ climb to power took place because most American hospitals were either solitary units or small chains of religious hospitals, all operating independently from one another.(2) 1942 was the landmark year for the administrators and the American Hospital Association (AHA). The AHA wanted more hospital beds but did not have the money to build them. They managed to form an influential publicly funded group, the Commission on Hospital Care (CHC) to study and legitimize the need for hospital beds nationally.

Passage of the 1946 Hill-Burton Hospital Survey and Construction Act provided matching funds for states to survey their hospital bed needs, matching funds for construction of beds needed, and generous annual operating funds.

Unfortunately, the Act made no provision for ambulatory, outpatient, or primary care facilities. The total number of community hospital beds nationally was increased by 195,000 (40%), and proved to be excessive. This overbedding weakened some hospitals and they were forced to close, declare bankruptcy, or become easy prey for takeover by the newly arrived for-profit hospitals. The stronger hospitals were saved by Medicare.(2,4)

Despite the fact that the CHC and the AHA underestimated the actual $3l7 billion Hill-Burton capital requirements by $1.9 billion as of 1971, and their estimate of 4.5 beds/100 people resulted in disastrous overbedding, the sheer number of new and old hospital beds increased the stature and strength of the AHA in their drive to dominate the hospitals.(2)

The Act also strengthened the position of hospital administrators with their local boards of trustees because of the amount of money and day to day planning involved in constructing new hospital beds. The perception of the administrator as an astute businessman was subsequently enhanced even more by the financial juggling needed to keep the hospitals solvent.

Like for-profit hospitals, non-profit hospitals were made viable by the overly generous Medicare/Medicaid rules for payment. Administrators read the legislation, unbundled hospital charges for maximum profit, and even regained capital through the liberal Medicare reimbursement rules for depreciation.(4)

Today, hospital administrators are called CEOs and their salaries, pensions, and perks have increased accordingly. Instances have been reported of hospital administrators of non-profit hospitals being paid salaries of $800,000 annually.(5) If these hospitals are non-profit, where is this money coming from? This is no small matter. There are over 3,000 non-government, non-profit hospitals in the United States, and 730 of them have 300 beds or more.(6)

In the mid-20th century split between two lines of hospital authority — clinical and administrative — the administrative was stronger. To hospital administrators, hospitals are “medical centers,” serving as the main coordinators of health services for the community.(2) They have expanded outpatient care, increased medical research and education, hired full-time physicians in specialized services, and added administrative personnel to run these various activities. The administrators wanted the power that had flowed to the doctors, and they got it because they were on-site full time and knew how to manipulate the medical staff and the board of trustees.

Compulsory National Health Care Consortium

Bismarck introduced the first national compulsory health insurance program in 1887 in Germany and demonstrated that the benevolence generated by paying for the costs of sickness could successfully be used for political control and to increase the political power of the state.(7) His lessons in turning benevolence to power did not go unnoticed by politicians and social planners in the United States, who wanted compulsory health insurance at any cost, and they were filed away by them for future use.(7)

In the 1920s, a consortium developed in the United States whose goal was government financed compulsory health care. Beginning in 1926 with the privately funded Committee on the Costs of Medical Care (CCMC) (2), members of this cadre and those who followed them have managed to serve as members or staff members on all important public or congressional health care committees or commissions dealing with the costs and distribution of health care.

Foundations have provided the needed funding and lobbying support. This consortium, which included social planners, politicians, economists, foundations, and doctors, is entrenched on congressional staffs, governmental agencies, academic centers and foundations, and spawns new advocates and replacements as others die off.

The Committee of the Costs of Medical Care was a privately funded independent body founded in 1926 by fifteen economists, physicians, and public health specialists after meeting in Washington, D.C. to discuss their growing concern about the costs and distribution of medical care. Harry H. Moore left the Public Health Service to serve as staff director. A year later, following a plan developed by public health professor C.E.A. Winslow, law professor Walton Hamilton, and Michael Davis, the CCMC secured funding from eight foundations for a five-year research program.

To confer respectability and stature, and to forestall possible criticisms of “socialistic tendencies,” the committee then named Ray Lyman Wilbur, M.D., president of Stanford University, past president of the AMA, as chairman. To gain the confidence and collaboration of the medical profession, 17 physicians in private practice and the secretary of the AMA were added. Eventually the committee numbered about 50.

Government Legislation and Implementation

The third enemy, perhaps to no one’s surprise, is the government. Legislation can be unjust to one facet of society while trying to protect society in general. This is what has happened to doctors. An atmosphere of frustration, fear, and helplessness has developed among doctors. Some Medicare/Medicaid charges are so confusing that it is easy to make a mistake in selecting the correct code, and an incorrect Medicare/Medicaid billing can be sufficient cause for a felony charge and conviction.(7)

Previously, when the bill was paid directly to the doctor by the patient, any discrepancies or errors could be discussed like a dinner check in a restaurant. Compare that with the way medical bills are paid today by third-parties. Office practice today is not only over-regulated, but many of the OSHA, EPA, and waste disposal regulations are frivolous and lack common sense. The penalties for perceived infractions are often excessive and subject to the whim of the investigator.

Legislation passed in the 1930s and 1940s authorizing the Public Health Service and the National Institutes for Health to fund grants for research and training fellowships outside of government was a bonanza for medical schools and for research institutions and medical complexes after World War II. Money was also funneled to the medical schools and postgraduate training programs for physicians by the GI bill.

The funds available mushroomed rapidly, and the schools and the research centers overexpanded. With the growth of research funds there was in-fighting in the medical schools between the science and clinical departments. At one time surgeons were very strong both clinically and administratively, and could pretty much run the show. Power shifted when the budget for the department of experimental medicine grew to five times the budget of the surgery department.(2)

The downside of this legislation was increasing dependence of grant applications for clinical and basic science medical research and of training fellowship programs on government funding. Unfortunately, medical schools, residency programs, and basic science researchers, among others, need these funds to remain solvent or must downsize, according to Petersdorf,(8) if non-governmental funds cannot be found to make up the shortfall.

President Johnson signed the Medicare/Medicaid Bill in 1965. Hospitals were paid on a cost-plus and service fee basis for each procedure, each x-ray, every blood test, plus a percentage of the total billing added on for return on equity. They also received payment for accelerated depreciation on hospital assets, including those acquired through the Hill-Burton Act.

Obviously, the higher the bill the greater the profit, and the capital reimbursed to the hospitals was greatest to those with the most expensive and newest facilities. There was no incentive to keep costs down. Doctors were paid according to their established “usual, reasonable, and customary” fees. Medical fees began to soar when young doctors with no established fee scales were able to charge, and were paid, much higher fees than long established doctors were allowed to charge, and many of the latter raised their fees whenever possible.

Medical and hospital costs escalated. The financial stability of the hospitals was guaranteed under this program, but the profits so generated spawned the beginning of the medical industrial complex and attracted Wall Street.(4)

In February 1971, President Nixon announced a new health care strategy adopting Paul Ellwood’s HMOs. Nixon said the traditional practice “operated episodically on an illogical incentive” which encouraged doctors and hospitals to benefit from illness rather than health, while HMOs reversed that incentive. The liberal idea of prepaid group practice for national health insurance was legitimized by Nixon’s reversing just a few words. His Revised Health Manpower Act of 1971 increased the supply of physicians by giving medical schools “capitation grants,” and adopted HMOs as state policy.2 Both the Nixon and Reagan administrations welcomed profit-making corporations as part of the health maintenance industry.

In 1973, further legislation aided HMOs by 1) mandating businesses with more than 25 employees to offer qualifying HMOs as alternative plans, and 2) grants and loans to develop new HMOs. During the Nixon administration, social expenditures greatly expanded Social Security, and a plethora of health, environmental, and safety legislation was passed.

In 1981, Maloney pointed out, “Unfortunately, policy-making in the health field in the United States has, for the past 20 years, been determined to a large extent by slogans: “the doctor shortage,” “crisis in health care delivery,” “maldistribution,” “health maintenance,” “access block,” “continuing medical education,” “relicensure and recertification,” “cost containment,” and “primary care.” He pointed out, for example, that “the ‘doctor shortage’ in the 1960s, [like] the... contemporary crises such as the ‘missile gap’ and ‘population explosion’ in the United States...ultimately proved to be nonexistent.”(9)

From 1965-1980, federal aid increased U.S. medical schools from 88 to 126,(10) including Puerto Rico, and graduates from 7,409 to 15,135.(2) By 1993-94, there were 66,453 medical students enrolled, of which 16,286 were freshmen.(11) The number of active physicians increased from 310,800 in 1970 to 414,900 in 1980, to 547,300 in 1990, and to 578,100 in 1992. The number of foreign medical graduates increased from 54,400 in 1970 to 81,600 in 1980, to 114,400 in 1990, and to 126,100 in 1992,(12) despite new 1976 immigration policies to reduce their number.

As noted by Maloney,(9) doubling the number of students admitted to medical school by legislation in the 1960s had resulted in an over supply of physicians by 1978 before many of these students had an opportunity to complete medical school and graduate training. The “doctor glut” continues. Whether the surplus will exceed the need for doctors by 70,000 or by 185,000 or more is moot. The fact is that in 1970 there were 310,800 professionally active physicians and in 1992 there were 578,100. This represents an increase of 267,300 physicians since 1970,12 and in 1993-94 there are 66,453 medical students waiting in the pipeline.(11)

[Continue to Part II]


1. Rowan D. The rise of corporate medicine. The “managed care” bandwagon is running traditional practices off the road. The Washington Post National Weekly Edition 1994;June 20-6:6-7.

2. Starr P. The Social Transformation of American Medicine. Basic Books, New York, NY, 1982, 514 pp.

3. Hanley R. St. Joseph vies for leadership in health care. Los Angeles Times 1985; November 10:V1.

4. Wohl S. The Medical Industrial Complex. Harmony Books, a division of Crown Publishers, Inc., New York, NY, 1984, 218 pp.

5. Blumenthal RG. Survey says most nonprofit groups paid chief executives over $100,000 yearly. Wall Street Journal 1993; April 5: B7.

6. American Hospital Association. Hospital Statistics. Data compiled from the American Hospital Association 1991 Annual Survey of Hospitals. 1992-93 Edition. American Hospital Association. Chicago, IL 60611: Table 2A, 10A.

7. Orient JM. Your Doctor Is Not In: Healthy Skepticism About National Health Care. Crown Publishers, Inc., New York, NY, 1994, 276 pp.

8. Petersdorf RG. Current and future directions for hospital and physician reimbursement: effect on the academic medical center. JAMA 1985; 253: 2543-8.

9. Maloney JV. Presidential address: The limits of medicine. Ann Surg 1981; 194: 247-55.

10. “Medical Schools in the United States.” JAMA 1994; 272: 715-19.

11. “U.S. Medical School Enrollments for Academic Year 1993-1994.” JAMA 1994; 272: 720-722.

Dr. Hilsabeck is an Associate Clinical Professor of Surgery at University of California at Irvine. His address is 11611 S.W. Skyline Drive, Santa Ana, CA 92705. Revised text of Presidential address to Priestly (Mayo Surgical Alumni) Society, Asheville, NC, October 28, 1994.

Originally published in the Medical Sentinel 1996;1(1):18-21. Copyright©1996 Association of American Physicians and Surgeons (AAPS)




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