CCMC: Incomes and Variations in Health Care Costs

Last week we explored where health care dollars were spent in the 1920’s and 30’s.  This week we look at the Committee’s concerns about the uneven distribution of medical costs.

Health care costs in 1929 were $3.65 billion. Of that, $1.09 billion went to physicians in private practice.  Their income is listed as being private pay from patients, with only $50,000,000 from ‘industry,’ and no payments listed from governments or philanthropy.  In fact, the only listing for medical care from government and philanthropy were for hospitals and public health. Government funds for hospitals  were listed for ‘operating expenses’ and ‘new construction.’  Public health listed no patient income, but did have funds from both government and philanthropy, primarily for charity care. (CCMC pg. 14)

The problem in 1928/29 was the distribution of health care costs and their adverse impact on families.  In 1928, about 50% of all families with two or more members had annual incomes of $2,000 or less and 40% had incomes of $2,000 to $5,000. Only 3% of families had incomes exceeding $10,000. (CCMC pg. 16)

This income, however, was unevenly distributed by geographic region.  In 1926, for example, the average per capita income was $735, but this income varied by region with the Middle Atlantic states averaging $1,039 and East South Central States (Kentucky, Tennessee, Alabama and Mississippi) averaging $369.  In 1919, ten states had incomes ranging from a low of $321 in Alabama to a high of $408 in Florida.   (CCMC op.cit.)

“By 1926 substantial changes had not occurred in the per capita incomes of the regions in which these states are located.  Even less than average charges for medical services, therefore, are more than many of our families can bear.” (CCMC op.cit.)

Distribution of Costs:  “The primary reason why the costs of medical care cause complaints is that the costs are uneven and unpredictable.” (CCMC op.cit.)  The CCMC conducted a study to learn more about the impact of medical costs on families.  In its study of 9,000 White Americans, the Committee found that 80% of the families earning $1,200 or less had medical charges of $60 per year and 2.5% had medical charges from $250 to $500.   

Consequently, the problem to the CCMC became one of “….equalizing the financial impact of sickness….But, the unpredictable nature of sickness and the wide range of services render budgeting for medical care on an individual family basis impractical. On the present fee-for-service basis, it is unreasonable for 99 per cent of the families to set aside any reasonable sum of money with positive assurances that that sum will purchase all needed medical costs.” (CCMC pgs.18 -19).

Responsibility for Uneven Costs:  Given the low family incomes and the high care costs, medical care was virtually beyond the reach of most families and hospitalizations were financially catastrophic.  Consequently, the CCMC began to look at insurance principles whereby “average charges are substituted for actual charges….much of the variation was eliminated by this procedure..”  (CCMC , pg.19-20).

Another reason for the variation in costs was the size of the community.  Health care costs decreased as the size of the community decreased.   It appears the CCMC thought that an insurance model for health care was the only way to eliminate variations in care.  However, to eliminate the variations in care, the Report suggests that all four basic types of health care services needed to be included: physician,  dental, health examinations and immunizations (public health), and hospital care.  Without having insurance for every family, however, meant that variations in care would continue.

This led the CCMC to examine:

Professional and Institutional Incomes:   The CCMC went on to observe that just because medical costs were too high for many families, did not “necessarily mean high incomes for practitioners.” (CCMC pg. 22).  In 1929, the average net income for a physician in private practice was $5,300. Also, physician income was much less evenly distributed than in comparable professions.  “….in 1929, one-third of all private practitioners had incomes of less than $2,500.  For every physician with a professional net income of more than $10,000, there were two who received less than $2,500.  The practice is especially great between general practitioners and specialists.” (CCMC op.cit.)

Physician income also varied by geographic location as well as by specialty.  The income of physicians in rural communities was less than half of their urban counterparts.  The Report concluded that a simple averaging of physician incomes would not be a solution to the cost problem.

Compounding the variation problems in costs are the large overheads in physician practices.  The average gross income for a physician in 1929 was $10,000. “Approximately 40% of this income goes for professional expenses, such as office rent, maintenance and replacement of equipment, salaries and wages of nursing and office personnel, transportation and other items. This large overhead of private practice adds to the cost of care to the patient, without financial return to the practitioner.” (CCMC pg 22-23.)  [Note:  malpractice insurance was not listed as an overhead item.]

While malpractice may not have had a financial impact then, but, indeed cost-shift did. When examining the practice of physicians offering free care,  the Report indicates that “….the institution of free work would be socially objectionable as a method of distributing the cost of free service, since it would assess this cost on only a section of the well-to-do—those who happen to fall ill.” (CCMC op.cit.)

But, one of the most slamming indictments of the fee-for-service system is how physicians are paid and the consequence of that payment system:  “One of the worst results of the present method of remunerating physicians is that practitioners may have, or have, or may be thought to have an economic incentive to create unnecessary medical services or to prolong illness. …as a consequence, some medical cases are prolonged unnecessarily; some unnecessary operations are performed by surgeons who are selected because of the size of the rebate which they secretly give to the referring family practitioner. ‘Fee-splitting,’ although strongly condemned by the medical profession, has arisen in part because of the unjust difference in many cases between the fee of a general practitioner or internist and the fee of a specialist. While fee splitting tends to overcome this inequality, it increases the costs of professional care, degrades the profession, and in effect puts the patient in the hands of the highest bidder. Furthermore, it weakens the incentive for skillful and careful work on the part of the specialist.” (CCMC pg. 24).

Observation:    Some 80 years later, how we pay physicians, the variations in care, cost and using patients as ATM machines is still alive and well, as reported by Atul Gawande, MD, in June 1, 2009 New Yorker article on Cost Conundrum:

Coming Next Week:  Nursing shortages, capital investments in medical practices and the challenges in the organization and complexity of medical care. 

I am beginning to see where this report is going and why it is going to spark an outrage in the medical community.

About Kathleen

Kathleen O’Connor: 30+ year health care consumer advocate, non-profit executive and author. For more information about Kathleen, please see "About" on the main content bar above.
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