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AHC’s and The “Medical-Industrial Complex” : Re-establishing Appropriate Checks and Balances

Posted on | June 20, 2014 | No Comments

Mike Magee

In this week’s New England Journal of Medicine, there were dueling articles addressing the question whether this nation’s investment in Academic Medical Centers is helping or hurting when it comes to improving the quality and efficiency of our health care system.

In the lead article, Gail Wilensky and her co-authors add up the federal and state subsidies for Graduate Medical Education (GME) in their first paragraph ($9.5B from Medicare, $2B from Federal Medicaid, $4B from State Medicaid, and $4B from the VA and HRSA) for an impressive $19.5B, and challenge conventional wisdom by stating that increased funding will not offset the cost of training physicians, and that indirect funding formulas only serve in “paying institutions more, rather than because they provide higher value”.

The second article, penned by experts from the AAMC, argues that “The cost of GME extends well beyond the costs partially covered by direct GME support. Investments in research and complex clinical activities are critical to the environment for robust, diverse training programs.”

It’s an inside the Beltway battle. But the real elephant in the room is the “medical-industrial complex” whose appetite over the past half century has become every bit as large as the “military-industrial complex” Eisenhower warned about at the end of his second term as President in 1960.

How did we get to this point? First, what is an Academic Health Center? Most consider an AHC to consist of a medical school and one or more other health professional schools (nursing, dentistry, veterinary medicine, pharmacy, public health) existing in tandem with one or more affiliated teaching hospitals, usually under common ownership or at least closely aligned. As vertically and horizontally integrated entities, they have significant market power and expansive programmatic offerings. These generally include a full spectrum of patient care programs, both in-patient and out-patient, the newest and most complex technologies, a rich collection of professional talent in all fields, a high volume of basic medical science and applied medical scientific research, and the full spectrum of residency and fellowship training programs.

Who pays for all this and when did it begin? The origins of the AAMC and coordinated advocacy by AHC’s dates back to the end of the 19th century. At that time a small group of institutions led by Harvard, Yale, Columbia, University of Pennsylvania, Johns Hopkins and others coalesced to explore how best to advance medical education, research and patient care. Medical education, focused originally on undergraduates, and improving the quality of their training (as exposed by the Flexner report in 1910) required a multi-decade concerted effort. Research at the time was a minor source of revenue for institutions who relied on modest foundation grants and the free service of busy clinicians.

As Eli Ginzberg frequently noted, World War II was a watershed moment for the future of AHC’s. In 1942, the AAMC and the AMA created a liaison board to consider the impact of the war on medical students and the provision of services for citizens at home. It would become the Liaison Committee for Medical Education (LCME). This body would concern itself with a range of issues including physician workforce planning.  Before the war ended, fully 40% of all physicians (55,000) were in uniform. As important, the war provided them with a taste for specialization and they liked the flavor of it especially when served up by medical luminaries like Hugh Morgan in Medicine, Michael DeBakey in Surgery and Bill Menninger in Psychiatry.

A sizable portion of these wartime physicians decided to take advantage of the 1944 Servicemen’s Adjustment Act’s (GI Bill) liberal financial support and reimbursement policies and went to AHC’s for specialty training. What they discovered were enterprises that were expanding, slowly at first, with the help of funds from the Hill-Burton Act of 1946 designed to improve patient access to hospitals nationwide, especially those in rural settings and the poor in urban environments. AHC’s took advantage as well of capital markets and linkages to the new Veterans Administration hospitals designed to manage the war casualties.

Demand after the war exceeded supply of both hospital beds and physicians, in part due to uneven distribution of doctors. Soldiers returning, 15 million strong, had been exposed to medical discoveries in surgery, blood products, antibiotics and barbiturates, and trauma care. Add to this, that as a result of the War Labor Board’s action declaring expenditures by employers as tax deductible business expenses not restricted by war time wage freezes, and the IRS’s subsequent decision to make health care expenses tax deductible, private health insurance coverage was rapidly becoming the norm for those with corporate employment.

As 1950 arrived, there was enormous public support for more health services and more medical research. To manage the former, it was felt, the country needed more doctors and more hospital beds. The federal and state governments addressed this at first with modest contributions for both medical education and medical school brick and mortar construction. To augment the numbers of physicians, immigration reform permitted a rapid influx of foreign trained physicians. As for the research, federal funding for Research and Development went from 3 million in 1940 to 70 million in 1950, with over 75% dedicated to the specialty dominated AHC’s.

With the influx of funding, bed capacity expanded and 11 new medical schools were added between 1946 and 1963 resulting in 1500 additional student slots, a 25% boost in graduates annually. In 1965, their were 10 additional schools being build, and federal and state “improvement grants” were at work in many others. And then Medicare and Medicaid were passed. This provided cost plus financing of large numbers of patients who in the past had been unable to pay for services. It also provided liberal direct and indirect cost reimbursement for GME programs. As a direct consequence of this, combined with the expansion of employer based plans, 3rd party payments of hospital bills rose from 77% of costs to 91%. In 1960, the total revenue of medical  schools in the US was  $436 M, with 40% or $176M federally funded. By 1976, the schools received $2.4B  with 51% or $1.2B  attributable to federal financing. Between 1960 and 1988, the number of physicians per 100,000 increased from 140 to 233, and total health costs rose tenfold to $497B, 11.2% of the GNP.

AHC’s which had been constrained by financial and physician resources, and managed with controls established by universities, independent local boards and philanthropists, now – flush with cash and driven by specialized departmental chairmen responsible for dollars from research grants, GME funds and patient services – expanded full bore into new technology, hospital facilities, research labs, faculty and GME programs of every shape and size.  And with the additional partnering funds of pharmaceutical and medical device companies whose reps were by now essentially “in-house”, top AHC leaders now had assistance in staffing clinical research, writing papers for publication, receiving invites to serve on journal peer review panels and governmental scientific bodies, and making presentations at prestigious meetings. The “medical-industrial complex” was now fully unencumbered and moving forward with an impressive head of entrepreneurial steam.

By 1983, the institution of prospective payment for hospitalizations combined with the growing excess of both hospital beds and academic physicians, signaled to all that the nation’s “caring capacity” had lost any reasonable linkage to actual need and was riddled with high variability, broad disparities, and unsustainable inefficiencies. Those who thought competition equaled cost containment were sadly disappointed in the years that followed. Rather the forces at work yielded a wide range of conflicts of interest, boundary pushing in advertising and marketing, widespread duplication of services, expansion of the uninsured, and widespread over consumption of services.

The bottom line is that continued advances in efficient and effective health delivery do require responsible national investment in both medical education and medical research. But as we move forward with reforms in the health delivery system as part of the Affordable Care Act, we would be well served to re-institute deliberate checks and balances on the “medical-industrial complex”, rather than enabling further expansion of the very entities that have been so instrumental in creating the complex set of challenges we are currently attempting to address.

For Health Commentary, I’m Mike Magee

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