Corporate Medicine, Physician Licensure a Bad Deal for Patients

Devin Herrick, Ph.D. (devonherrick@sbcglobal.net) is a health care economist. Physician licensure has created a cartel—there, I said it out loud.

The right to practice medicine has high barriers to entry, both in terms of high standards and high costs. It takes seven to 11 years beyond college to train a new physician, but the process begins long before medical school.

A successful application requires not only excellent grades but also excellent grades in the right classes. Going back to the 1970s and possibly before, medical school acceptance also requires extracurricular activities, such as internships and volunteering at hospitals, clinics, social organizations, or churches. The competitiveness to get into medical school has gotten worse over time.

Another barrier to entry for practicing physicians is graduate medical education residency programs, required to practice medicine in all 50 states. The shortest residency is three years, with some lasting up to seven years.

Artificial Residency Shortage

There is a shortage of residency training slots. It varies, but in some years, there are upward of 10,000 medical school graduates who apply for a residency program but are turned away. Most residency programs are funded by Medicare and there has been a restrictive cap on the number of new residencies since 1997.

Congress capped the number of new Medicare-funded residencies after lobbying by the American Medical Association (AMA), which argued there would soon be a glut of physicians. Strange, isn’t it: the trade association whose members stood to gain the most from a physician shortage lobbied for a cap and Congress believed them.

Another regulation contributing to the cartel power of physician licensure is the Durham-Humphrey Amendment of 1951. It ostensibly only required habit-forming drugs to be dispensed by prescription, but led the way for a drug class where all newly approved drugs are available only by prescription. That is unfortunate because the Durham-Humphrey Amendment resulted in much higher prices for drugs than would otherwise be the case.

Corporate Ownership Banned

Physicians are the gatekeepers of the U.S. health care system, rendering their licenses very valuable.

There is an old joke of sorts in health policy. Question: what is the most expensive medical device? Answer: the physician’s pen. A licensed physician must sign off on all drug prescriptions, all hospital admissions, all surgeries, all therapies, and all diagnostic services. That makes the cost of physicians’ pens collectively about $4 trillion. In years past, hospitals would attempt to curry favor with doctors because only doctors could refer patients to them.

There were also laws in many states prohibiting doctors from working for hospitals or practicing medicine on behalf of corporate entities. In other words, non-physicians could not practice medicine by hiring physicians to do so on their behalf. Going back decades, laws in about one-third of the states prohibited the corporate practice of medicine, while about one-third of states allowed it under some conditions, and the remaining one-third were vague on the concept.

Physicians Have Become Employees

Today, the prohibition on the corporate employment of physicians is rarely enforced. Hospitals and investors get around prohibitions on the corporate practice of medicine by placing physicians as the nominal head, but with no real power, over corporate-owned medical practices.

Various state medical societies are starting to take notice. This includes Michigan, about which I told Health Care News: “The problem with allowing the corporate practice of medicine is that doctors are no longer advocates for their patients. When physicians are employed by hospitals, private equity, health plans, or corporations, they answer to their employers rather than to their patients. That can result in unnecessary care and unnecessarily expensive care.”

Physician groups in California are among those taking notice and are suing to enforce the state’s prohibition on the corporate practice of medicine. Numerous corporate entities are employing physicians for the use of their licenses. In the past, doctors maintained they controlled their licenses and would not put their employers’ rights above their patients.

Salaried Doctors Can Be Cashiered

Over the objection of medical groups, physician employment has skyrocketed in the past two decades. Nearly three-fourths of doctors work for a hospital, an investor-owned group practice, a health plan, or some other entity.

M.D. employment has gotten so pervasive, and the use of noncompete agreements so widespread, that most employed physicians do not have the leverage to push back against abusive corporate practices. In addition, physician compensation is often tied to revenue targets, making it even harder for physicians to put the needs of their patients first.

A version of this article was published on January 24, 2024, on the Goodman Institute Health Blog. Reprinted with permission.