Modern Medicine Is Undergoing Idustrialization

By Scott Gottlieb

2011 will mark the last year that a majority of America's physicians own their own medical practices and operate their own offices or clinics.

The notion of the newly minted doctor who rents an office and hangs out his or her own shingle is a quaint reflection of a Normal Rockwell era that has expired.

In its place, medicine is undergoing industrialization, where doctors are becoming owned commodities of large hospitals and health plans. This model was made largely inevitable years ago, with the passage in 1997 of the Balanced Budget Act. Under the Obama healthcare plan, it's become the standard for the entire system.

In the 1997 deal to cut the deficit, the Clinton administration joined with a Republican Congress to cap total payments to doctors and implement a system of price controls for their services. But once physicians had their work priced by a fixed government schedule, medicine ceased to reward the quality of their service.

The best physicians were paid the same government rates as the worst doctors. Under this scheme, the only way for doctors to increase their income was to increase the volume of patients they saw and reduce costs by squeezing the level of service. Enter the 15-minute office visit, and waiting rooms with bad magazines.

President Obama's healthcare plan, the Affordable Care Act, capitalizes on this structure, and embeds it as the basis of a vision for controlling costs by managing the practice of medicine. The entire law is premised on the belief that consolidating doctors, and turning them into salaried employees of hospitals and health plans, makes it easier to control utilization and make care more coordinated and efficient.

At the core of this premise is a concept called the "Accountable Care Organization". The idea is that large organizations will take responsibility for the care of a population of Medicare patients. If the entity improves overall medical outcomes and lowers costs, it can keep some of the money it saves the Medicare program.

The ACA relies heavily on this concept. But the idea of an ACO is just a reinvention of the old concept of capitation, where doctors are put on the hook for the costs of their medical care. This idea was at the heart of the move to HMOs in the 1990s. Doctors have a financial incentive to economize on medical care since they get to keep some of the money that they save. No ACOs have actually taken shape. But that hasn't stopped the scheme from becoming the prime fashion in health policy circles.

The attraction to ACOs has become a bipartisan romance, with state legislators also pinning their hopes on the amorphous idea as a way to control state Medicaid costs.

In Utah, Republican State Senator Daniel Liljenquist has introduced one of the country's most ambitious efforts to move Medicaid patients into ACOs. The problem is that the incentives wrapped around the ACOs in Utah, like the Obama plan that it's modeled after, aren't big enough to really change the behavior of providers.

That's why the Utah plan, like President Obama's scheme, is coupled to more direct controls on access to, and utilization of, high cost medical treatments.

Under the Obama plan, that control is exerted through a central board that is given legislative authority to set prices on individual treatments. In Utah, the Liljenquist proposal is coupled to a scheme for banning high-cost "unproven treatments." The Utah plan is similar to a rationing strategy implemented in liberal Oregon. Since the ACO's lack real incentives to change what is being practiced, they fall back on coercion.

And therein lies the flaw embedded in the entire scheme. The kind of changes needed to introduce real innovation in healthcare services require significant investment of capital. But liberals don't want to see entrepreneurs earn above market returns on their healthcare service ventures. They see each dollar of excess profits as a buck taken away from direct patient care. So venture capitalists - who have been the source of most of the meaningful innovation in healthcare delivery -- aren't touching business plans being circulated by would-be ACOs.

That's also why ACOs are mostly attracting the attention of hospitals which are mostly using the concept to conceal their desire to roll up doctor practices. Hospitals have long wanted to solidify their local market power, but Medicare provisions and the Federal Trade Commission has stood in their way. Now those pro-consumer protections are being waved or ignored by an Administration zealous to double down on the dream of ACOs.

There's a belief that turning doctors into salaried employees of large organizations will somehow lead to magical efficiencies. But real change in healthcare isn't different from innovation in any other sector of the service economy. It's the fruit of entrepreneurs who risk capital to re-organize how a business is delivered.

The ACOs will fail because they aren't premised on attracting investment to change how healthcare is delivered. They are just moving around the current pieces. Doctors will find themselves the pawns in this game. But it's the patients who, faced with declining services and restricted access, will find themselves in checkmate.


American Enterprise Institute (AEI) Resident Scholar Scott Gottlieb, M.D. is a practicing physician.  He previously served in senior positions at the Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS). 

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