0:33 Intro. [Recording date: May 22, 2017.] Russ Roberts: Christy Ford Chapin's book, which is our topic for today, is Ensuring America's Health: The Public Creation of the Corporate Health Care System.... Your book is a history of health care in the United States over the last century or so, and it tries to explain a couple of peculiarities of the U.S. system. In particular, why it's so expensive--which I think a lot of people are aware of; but something they are not so aware of is why it's so fragmented. And so specialized. Which we sort of take for granted; I think most of us do take for granted. What I really liked about the book is that it reminds readers that the way the world is now may not be an inevitable result of the way things have to be. In particular, the American health care system is dominated by patients who are spending other people's money. And how that's done, that spending, may not be as inevitable as it appears. So, I want to start with what you call the insurance company model. How has insurance evolved in the United States? And what were the key decisions--players that brought us where we are today? Christy Ford Chapin: Okay. Well, the reason I point out that we have this model called the insurance company model is that a lot of people assume, 'Well, the health care system by and large is what you would have in the absence of comprehensive health care reform.' So, of course, we got comprehensive health care reform in 2010; but before that, we really just had, you know, some more minor interventions with Medicare and Medicaid serving certain population growth. So, what I'm trying to point out is that the system is not at all what would have naturally evolved out of competitive markets. Because, if you look back at the history, to the first several decades of the 20th century, for example, what you see in the medical marketplace is numerous different models. There were union plans. There were consumer cooperative plans. Mutual aid societies had their own health care programs. There were pre-paid physician groups, which are very similar to some of the physician health care cooperatives we have that are being tried today. So, you had all these different models. And some of them were very elegant and very efficient--made consumers and health care analysts very happy. But, the AMA (American Medical Association) made an intervention at the end of the 1930s. Russ Roberts: That's the American Medical Association. Christy Ford Chapin: That's right. The American Medical Association, which represents physicians. So, one of the arguments I'm making in my book is that, for a number of reasons, the AMA really was the primary regulator of the health care market. One of the primary reasons for that is because of licensing laws. Now, I know a lot of people think, 'Well, licensing laws make a lot of sense. Of course, we have to have those.' But, particularly during this period they were used to keep out any physicians that the AMA did not want to see participating in the market. Of course, women physicians, African American physicians--because AMA members controlled the state licensing board. Now, this became very important in the medical marketplace because the AMA decided that they were against all these different types of models I was just explaining to you: the consumer cooperatives, the physician groups, the union plans certainly. They were afraid of any other third party coming into the health care system and getting power, because they wanted to keep their power. Obviously. So, they opposed all these programs. And any physicians that contrasted with these plans, whether it was union plans or mutual aid societies--say, an African-American Mutual Aid Society or perhaps some other ethnic group such as the Jewish Mutual Aid Society--they would do whatever they could to get their license pulled from them so they couldn't practice medicine. They also had a lot of power over hospitals: It was usually rather easy for AMA physicians to have another physician who was not obedient to the AMA way to have their hospital admitting privileges revoked as well. They would often be expelled from the local medical society, which meant no referrals, no ability to get malpractice insurance, which was already a problem in the early 20th century. So, they had a lot of power. And they could shape the health care market to serve what they saw as their professional objectives. And one of these things was that they were not going to allow these different experiments. And, believe it or not--a lot of people don't realize--the AMA was actually against health insurance. They were completely opposed to any kind of prepaid health insurance. And it's not until the end of the 19-- Russ Roberts: Explain why. Christy Ford Chapin: Well, the reason they were against health insurance was because they didn't want any third party payers involved in this system. I think they recognized, quite rightly, that once you introduced a financier to the system, there's the worry that the doctors would become beholden to the financiers. And that would diminish their sovereignty, their autonomy to practice, their pay. And also, during this period, you had the rise of the large corporation at the end of the 19th century. It gets easy for a lot of us to forget just how scary this was, to a lot of different groups, at the end of the 19th century and the beginning of the 20th century. Physicians were really afraid of getting pulled into a gigantic medical corporation. And that's--they feared a lot of these experiments were just kind of nascent corporations that would evolve into large medical corporations where physicians would be in a hierarchy, under other people--particularly lay people who didn't understand medicine--and reporting to them. Kind of like the engineers. They didn't want to become the engineers. They wanted to maintain their autonomy.

6:47 Russ Roberts: So, let's talk for a minute about some of these pre-1930 health care arrangements. And of course the irony is going to be--we'll eventually get to this, and it doesn't matter if we get to it or not because everybody understands it--the irony is that the AMA, through their fighting against certain types of models, ended up with a model where there was 3rd-party payment everywhere. And they were--did lose a lot of control. Doctors lost a lot of control over what procedures were done and how often and how, and so on. We obviously live in a world where the government and the insurance companies are in many ways steering the health care system, for better or for worse. I think mostly for worse. People can obviously disagree about that. But I want to go back to the pre-1930s, before the AMA flexed its muscle. And as you point out in the book, it's much less powerful today than it was then. Then, it was much more powerful. And you gave some examples of how they used their power. But, let's talk about what those models were like. Go through a couple of them. Let's go through the Doctors' Groups; maybe Pre-paid insurance; and the Mutual aid societies. How did they work? And how were they different from the current, say, health care that many people have today which is run through their insurance companies? Christy Ford Chapin: Well, the interesting thing about all of them was there was no insurance company. So, I'll give you two examples. One example would be unions. Unions had a variety of different plans. They had some funds where they actually hired physicians on salary. And the union leaders would actually elect boards; and they would appoint a physician; and then the physicians would supply care for the union members. But, more common really, what you saw was unions contracting with physicians and hospitals. And they were very savvy. Union leaders really--they had a lot of expertise in health care and its arrangements. They were very savvy, very early on, in understanding such things as needing to have co-insurance and deductibles in place so that you didn't have one or two members, or certain members needlessly running up--attempting to tap into the fund if it wasn't necessary. You would even have some cases where a union fund leading might go with somebody to the doctor to make sure that they really were sick and not just shirking their responsibilities. So, they had a lot of understanding early on. And they are certainly were important all the way through the 20th century in the way the health care system develops, as far as being very important at the bargaining table for how the insurance company model ends up developing. But, another example that I found particularly compelling in my research was what was called the Prepaid Physician Group. And, pre-paid during this period was just a synonym for insurance, really--it was just a physician insurance group. And what was so interesting about these groups were two things. First of all, they were multi-specialty. So, you had, you know, when you say, 'Oh, physicians practiced in groups,' and people think, 'What's the big deal? Physicians practice in groups today.' But the groups they practice in today are single specialties. So, they are all general practitioners; or they are all orthopedists. During this period, what you had physicians wanting to do--and it makes so much sense--is, they wanted to have the surgeon, orthopedist, the general practitioner--you can imagine--the cardiologist. The full spectrum of physicians all practicing together. And the idea was they would provide comprehensive, integrated care in one place. It's easy to lose sight of how important integrated care in one place is. Unless anybody listening to this who is themselves or who is chronically, a member of their family or friend who is chronically ill, or is having a difficult time getting an accurate diagnosis for what it is that is ailing them, they will understand how important this point is. Under today's system, somebody who is really sick has to navigate, you know, a bevy of different specialties--passed off from their specialist, I mean from their general practitioner, to perhaps the cardiologist and perhaps a surgeon. And they have to navigate all these different physicians. Now, if they are having a hard time even finding a diagnosis, under our current system a doctor can only do so much for them that is billable, and they are just going to send them off to a specialist. And nobody might ever even know if that person gets a correct diagnosis. There's no way--the person could die soon afterward and nobody would even know because nobody really owns that patient, so to speak. Under these Pre-paid physician groups, what happened is they would also provide insurance. So, you would have one-stop shopping, where you would pay as a family or as an individual. Instead of paying your monthly fee to an insurance company, you would pay it to a doctor group or physician group. So there were no insurance companies; the physicians acted as insurers. And this was really crucial not just for providing high-quality, integrated care, but also for keeping costs down. Because one of the arguments I'm trying to make in my book is that incentives really matter. And we need to make sure that, particularly physicians, are incentivized correctly. They are the ones with the requisite expertise to know when a patient needs more care or doesn't need more care. These are decisions I think we want to have made at the physician-patient level, and not by insurance companies, government officials, or whoever it might be, many layers up. We want these decisions made on the ground. And, what was so interesting about these groups is that, today--we'll talk a little bit more about the insurance company model, but the way it's set up is physicians are incentivized to over-utilize care. Which means they are incentivized to provide as many services and procedures as possible, because that runs up the bill-- Russ Roberts: That's how they get paid. They only get paid from the services they provide, not from care generally. Not from spending time with a patient. You can't spend time with a patient. Christy Ford Chapin: Right. Exactly. Russ Roberts: 'I went to a doctor.' You don't get any money for that. Which is crazy. Christy Ford Chapin: Right. Russ Roberts: Drives me crazy. Christy Ford Chapin: Right. You can't--for an email or a phone call, you can't--that's not billable, as a lawyer would say.

13:21 Russ Roberts: Well, forget email and a phone call--I once went, was considering switching doctors. I went to see a new doctor; and we chatted for 5 minutes, and then he said, 'Well, let's do a--' I forget what he wanted to do--an EKG (electrocardiogram) or something. And I realized, 'Oh! He needs to bill. He needs to do something.' I didn't need the procedure. But he needed to do something so he could justify spending half an hour with me. It was, like--that was it. That was horrible. But I'm sure that's par for the course. Christy Ford Chapin: Yeah, and I'm sympathetic. I understand. I understand. But the problem is that we have to tie--the doctors need to be tied to the bottom line. There's a certain amount of resources, and we want the correct people deciding how those resources are used. Now, under these Pre-paid groups, it was perfect, because by tying them to the bottom line--the way they were usually paid was a set salary, and then a portion of the quarterly profit. So they wanted to be profitable. So it was not in their best interest to just kind of run up the bill and send it far, far away to an insurance company that, you know, they really had no other connection to and didn't care about. But, also, it was not in their best interest to withhold care, either. Who is going to--it doesn't take long for the word to get out that, 'Why am I bothering paying these people my monthly fee?' You can imagine the scenario today. You've heard these stories. 'I've been having these awful headaches for a year, and I can't get a CT scan (Computerized Tomography scan)--you know, say, you are under, maybe, an HMO (Health Maintenance Organization) like Kaiser, something that's a little bit more controlled. If you are wanting your prepaid group to be profitable, you also want to make patients happy. So, you are not going to withhold care. Which is a big problem in some systems, such as the British system, for example. Russ Roberts: For sure. What's the difference--and I have friends saying, who do tell me there's a very different medical experience there, good and bad--but, a mix. What's the difference between the model you are describing and either an HMO or a hospital? So, my dad was in the hospital recently, and I went to visit him. And I think I counted, in the two days I was there, 17 different people who spent time in that room, who were hospital employees. And I think there were probably of those 17, maybe 8 of them were--a bunch of them were nurses, just nurses. But some were specialized nurses. And some were different kinds of doctors. And some were people who just administered measurement of things. So, they were all at one place. There was no navigation. And isn't that also what an HMO does--it's sort of a one-stop shop? So, in what sense is there something different about the model you are describing? Christy Ford Chapin: The sense is that, in this case, yes, the doctors act as the financiers. So as an example, as a hospital, or Kaiser Permanente, those physicians are on salary. And so, then you have a whole different situation, where they are not incentivized to be very careful about health care resources, either-- Russ Roberts: Well, they are [?] but indirectly. Not as directly as they might be. Christy Ford Chapin: Indirectly. And so, the complaint you tend to hear about those is more withholding care. Russ Roberts: Yeah. Christy Ford Chapin: They are not incentivized to care as much about--if you are just on salary you are not as worried about patient satisfaction. You know, you are working for your salary: What is the reason to put in the extra time to do the extra surgery, to get the person through who needs it done right away? So, they lose the incentive in the other direction. And that's why it has to be set up so that they have to--it's a really fine line that they have to walk; and they're the ones who have the expertise to do it. They are the ones who are with the patient, know the patient, and should be incentivized to get to know the patient, actually, like you say. And not to--the interview as quickly as possible and move through to the next person kind of like an assembly line or what the AMA used to call 'supermarket medicine.' So, that's the difference. The Kaiser Plan--those aren't owned and run by physicians. That's a different, third-party corporation that's running it. [?] Russ Roberts: And, similarly, what about the hospital? Obviously it has some of the advantages. But even there, they have a problem talking to each other. I worried, as anybody who has had a relative in the hospital worries, that there's all these people tromping through; it's great that they're really smart and specialized and know a lot about the thing they are supposed to be examining. But you worry that they don't really--I mean, they get to look at the chart, I guess. That helps. But sometimes you worry that the left hand doesn't know what the right hand is doing. Christy Ford Chapin: Right. Exactly. And in those cases, two events, any kind of controls on costs or the way resources are used are always going to come from above. So, you will have them coming from hospital administrators, in that case. Or insurance companies. Or the actual Kaiser plan. And that always gets very problematic because--this is where we start getting into the regimentation of what physicians can and can't do. And that's very problematic, because it's starting to take away the art of medicine. I think we all know that medicine isn't just a science. It's an art. And there's things that physicians can do and innovate on the ground that in a lot of ways they've been straitjacketed into the system of: They have to follow so many kind of blueprints and standards, whether they are in a hospital, whether they are a physician practicing under the insurance company regime. You hear physicians say all the time there's ways they could innovate; there's things they could do--that it doesn't really matter; they are going to get paid the same way either way. Or, maybe they can't do it because it's not billable. Or taking all the innovation or the ability to innovate away from the physician.

18:50 Russ Roberts: And also the local knowledge. And, one of the things that strikes me from your observation about having the decisions made close to the scene--that is, the patient, the doctor; I've always argued for that on incentive grounds. But I think the really interesting part is the knowledge part. So, you know, as you say, there's a whole set of strictures put in place by insurance companies to prevent wasting money. Which happens. Because the way the incentive--there's no direct incentive for the parties, either the patient or the doctor to do, necessarily, the best thing. And as a result, there are all these rules: 'Oh, I'm sorry. That's not covered.' 'Well, what if I want it?' 'Too bad.' Or, 'It's free.' 'What if I don't want it?' 'Don't worry; it's free.' On both sides. And of course, the part that's also missing, I'd say, from our current system that I also thought about while reading your book is that there's no culture of doing the right thing in medical world any more, either on the patient or the doctor side. Obviously there's an incentive to do the right thing: You don't want to kill your patient. We all understand that. Many doctors have tremendously dedicated and are amazing, extraordinary people. I'm not suggesting otherwise. But, to do an extra task--because maybe it's not really necessary or it's not worth the cost is so alien to most people, on either side of the transaction. And so many times, I've said to my doctor, 'It just doesn't seem worth it.' And they say, 'Well, but it's free.' I'm thinking--'Why is that?' I understand, but it doesn't seem like it's right. And that whole extra piece of, you could call it micro-regulation, is just not present in the culture. And it has been destroyed--partly through the systems of incentives that you are talking about. Christy Ford Chapin: Right. Because when I was looking at these Pre-paid groups--I mean, imagine a culture, and this is what they did--if they had a patient who was chronically ill or [?] maybe elderly and maybe had a lot of different problems going on, at the end of the day, after they stopped seeing patients, these physicians would sit around the table and discuss their problematic cases. Could you imagine that today? Where they actually--you have all these different specialists? You know, say, a patient needs to see four different ones, talking about which medicine they should be given, if they should try this, what needs to be done first? And then, could you imagine the physicians learning from one another, cross-specialty? It's such a check of quality on so many different levels. They are continuing to learn from one another; they are very much having to discuss what they are doing with one another. That's another check on quality. And then of course even just bringing down overhead costs, because everybody is in one spot, not all across town. Equipment costs would be a lot cheaper because they would all be shared within one larger group or multi-specialty group. So, there were just--the culture of medicine would be so different if we had gone off on this path. Russ Roberts: Well, my wife and I started House, MD, recently. We were a little late getting into television series. And on that show it's a bunch of really smart people. With quirky personalities, yes. But they are constantly thinking and working on these patients. And, of course, in real life, they are dashing from office to office in a very different way. Christy Ford Chapin: Exactly. Exactly. It's very romanticized on that show. Russ Roberts: Every test. Every patient gets every test. You know, there's MRIs (Machine Resonance Imaging) out the wazoo constantly on that show. My friend, a good friend of mine is an emergency room physician, and it drives him crazy that some of his younger colleagues are always, 'Well, let's do an MRI.' And he says, 'Well, what would we learn from it?' 'Well, we'd confirm the diagnosis.' 'Well, isn't that a kind of expensive way to confirm it? Can we think of a cheaper way to do it?' And that natural incentive isn't often there.

22:31 Russ Roberts: So, what changed? How did we get to where we are? Describe the nature of the current system. And how we got there from that system you are talking about. One, you said the AMA worked hard to stop it. But, of course, the AMA got eventually less powerful, and other forces pushed in this direction. Christy Ford Chapin: Right. Exactly so. Basically, you have the AMA trying to keep the health care system on a 19th century model, right? This individual physician practicing only extracting payment from the patient once they've seen them--no insurance. Russ Roberts: [?] Christy Ford Chapin: Yeah, exactly. And so, this romantic vision they have. They end up realizing this isn't going to last because in the 1930s, the Great Depression and the New Deal you have reformers looking around, all these amazing political economy experiments are going on with the Federal government intervening in various sectors. And, of course, the health care sector is obviously low-hanging fruit, in large part because of what the AMA had been doing to completely level and destroy the marketplace. So, this made sense, that they would look at Federal funding for health care. And, a lot of reformers really wanted it to go into the original 1935 Social Security Act. President Roosevelt--very astute politician--realizes this is not a good idea and could sink the whole bill because the AMA was so powerful and he didn't want the doctors to sink this entire bill. The AMA--one of the reasons it was so powerful was it was organized at the national level, the state level, and also county or city levels. So it's three levels that matches our Federal system, so it made it easier for AMA physicians to lobby and exercise influence at that time. Most physicians did belong to the AMA, unlike today. But nonetheless, that 1935 attempt to get it into the Social Security bill just launched perennial efforts to reform health care. FDR (Franklin Delano Roosevelt) called a national health care conference; you start to see at the end of the 1930s legislation being proposed to introduce federal funding to health care. And that's when the AMA realized is they continue on this course of just stamping out everything that's going on in the marketplace. And so, they decide they need to come up with a model that they can uphold as, 'This is the private market model. This is what we are upholding; it's far better than anything that officials and policy-makers can conceive of through legislation.' And so, this is the really amazing thing, is that AMA leaders, out of thin air, just make up a model. And it's the model that we have today. They just make it up. They decide that they are going to finally allow health insurance, but physicians are still not going to be allowed to practice in multi-specialty groups; they are not even happy about groups, but they are going to let it go if they are single-specialty--again because of the fear that they could turn into corporations, medical corporations. And even though they are going to allow health insurance, it cannot run through consumer cooperatives or unions or physician groups. It can only go through insurance companies. Insurance companies are going to be the only ones allowed to participate in this model. And then the two other very important features of this model is that they required insurance companies to pay physicians on a fee-for-service basis. So, in lieu of a set salary or a capitation payment--which would be, like, a set annual or quarterly payment based on the number of patients you were seeing under that plan--that would be a flat fee. They weren't going to allow that. It had to be fee for service so that the physicians were paid for every single service and procedure that they provided. And, the next feature was that insurance companies were not allowed to question the way physicians practiced medicine; they weren't allowed to supervise them, question their practice. So, basically they are asking insurance companies to fund a service for which they cannot control the supply--or even forecast the supply. And this was so obviously problematic--the insurance companies didn't want anything to do with it at first. It takes a long--it takes many years really for them to kind of get dragged into this insurance company model, with complete physician autonomy, fee-for-service payment, and practicing individually, not in groups. The insurance companies finally decide to go along with it because they want to join the AMA in trying to keep the Federal government out of the health care sector: there's a belief in--particularly coming out of WWII--AMA comes up with this model at the very end of the 1930s. But insurance companies are kind of reluctantly climbing on board and there's this belief in the 1940s that they kind of have to take a hit for the entire business community. There's this idea, a kind of domino theory, that if health care falls, if health care is nationalized or socialized then it's going to create such an important precedent that will lead to similar actions across all business sectors in the entire economy.

28:09 Russ Roberts: So, a lot of what was motivating the AMA--which is sort of fascinating to me, not knowing any of the ideological battles of the 1930s and 1940s over these issues--is that they were worried about socialized medicine, or at least they used that as their scare tactic. And personally I think they were right to be scared about it; and it is not a good thing. You'd think a lot of people would find that not so effective, but it was effective. In those days, a lot of Americans didn't want to be socialist, didn't like the idea of the government running those things. And it was an ideologically effective argument--ironically, of course. The government's role just continues to grow steadily over the last 6 decades, 7 decades, anyway, particularly in the 1960s with Medicare and Medicaid. I just want to say, before we go any further, that it drives me crazy when people say, 'Well, obviously you can't have a free market in health care: look how horrible our health care system is.' We don't have a free market in health care. We don't even have anything remotely like it. There's nothing remotely like prices in most of our use of health care, which is kind of an example of what would happen under free market health care: there would be things like shopping, consuming, buying, paying. Instead, we have this weird, semi-private--it looks private, because these health insurance companies are typically for-profit--they are not all, but they are typically for-profit. And I have doctors who, they are employed on their own; they are not government employees like they would be in, say, the United Kingdom. But it's not very private, because it's highly distorted by a whole bunch of stuff, one of which is the subsidies to demand--through Medicare and Medicaid--the subsidies to demand through the tax deductibility of the private insurance market. But you are really suggesting that the whole structure of the system is not really consistent with what the market would have produced if it had been left alone. And you can debate, I guess, whether the AMA is a private or public piece of that. You could argue it's still private because they were private, and all that. But the idea that their ability to control licensing and other things helped steer us in this direction is a very interesting argument. Christy Ford Chapin: Right. Yeah; I think it's important. I think most people, or at least academics and scholars, understand that the AMA--we know the AMA was against government intervention in health care; we know the AMA was against socialized medicine. But the other, just-as-important part of that story for understanding the health care system we have today is that the AMA was against the marketplace. Against competitive markets. Very much so. And I think this has been misunderstood for a long time. I think a lot of people think, 'Oh, well, they're against socialized medicine, so, you know, they are all hanging out with their Adam Smith ties, and they are all laissez faire.' Absolutely nothing could be further from the truth. Because the idea then, too, of the profession is 'We're physicians, and we don't belong to marketplace.' And, a lot of people want to argue, even today, 'Oh, you can't apply economic efficiency standards or thought[?]--' Russ Roberts: markets-- Christy Ford Chapin: 'markets--to health care. It doesn't apply.' And I just want to say, historically that's the exact same argument that the AMA made in order to have control over the marketplace: You know, keep women and African Americans out, and then create this model that--at the time, not only did insurance companies not want to get involved with it, but every single person recognized that this model is going to drive up health care costs and drive up the cost of insurance. It wasn't an ideological thing. Republicans and Democrats recognized this. Health care analysts, doctors knew it; insurers knew it. Everybody knew that this is problematic. We've just forgotten that.

31:59 Russ Roberts: So, let's talk about that. Because, you make the point--as I also do from time to time--that the current set of incentives is not really conducive to cost control; and it's not surprising that costs rise steadily. And, in particular, that, say, adopting new technologies, those kind of decisions, how much technology you use, whether to use this new device or an old device--those decisions which in a marketplace would be made by consumers spending their own money, is made by the insurance company, typically. Making it "free"--out of pocket at least--to the consumer on that procedure. At the margin. Of course, you pay for it in the form of higher taxes. You pay for it in the form of higher fees--premiums--to the insurance company. But this whole idea that this system is going to be effective is a little bit crazy. And, as you point out, the incentives are not very good. So, talk about those incentives. And, the puzzle I think I have is, given that there is some market force still involved in this, why don't insurance companies--why aren't they more effective in keeping costs down? So, talk about why the current model continually drives up price; and then why it isn't reined in in any way by the insurance companies themselves. Because you'd think, maybe, that they would have an incentive to do so. Christy Ford Chapin: Right. Well, so it starts out--just giving a little more history on the model and how it took off will help your listeners understand that the AMA created this model in the late 1930s, and the reason it spread isn't because it's efficient, isn't because it's a cheap way to access medical care. It's because physicians and insurers are very self-consciously expanding the model and attempting to expand coverage, because they are trying to race ahead of the government--the Federal government. So, I already mentioned what was going on with reformers eyeing health care during the 1930s. I think a lot of people are aware of the big push at the end of the 1940s with President Truman proposing universal health care. And, what you see in all these episodes is this pressure: Almost every single physician, conference, insurance company conference, that--I'm reading all the speeches and all the talks and everything--you always have leaders saying, 'We have to hurry up and expand the insurance. We have to spread this insurance. We have to spread it in order to prevent the government from reforming health care.' And at the same time, you have insurers talking about how they are losing money. How it's not profitable. I mean, even by the early 1950s, you still have insurers saying, 'This is ridiculous, that we were even involved in this.' But, by that time, we are starting to get organizational build-up, in the private sector where you are having, um, you know, departments created within life insurance companies: You put an executive in charge of that, so people are starting to have their territory. They are starting to have organizational buildup; they are starting to be--in the insurance industry, this idea that now we are getting more and more accustomed to this model. But all the while, they cannot believe--even though they are forecasting it; and they are having a lot of problems making money, is because there's this problem of over-utilization and over-supply of care because of the fee-for-service payment. In fact, one of the things I uncovered in my research, another thing that has been forgotten, is how there was this crisis: In the 1950s, if you go back and look at the media of all this coverage about all these surgeries that were going on that weren't needed. So, you had pathologists testing the tissue of the appendixes that were removed from patients, and finding, you know, 70% of them are not diseased. Okay, you expect 10, 12, maybe 15%. But 70%? Hysterectomies. You know, tonsillectomies. All these problems, showing that physicians are realizing, 'Hey, this is an easy way to bill the insurance company.' And so, it is a big crisis, that's covered. And so, what ends up happening is, this is, as much as the physicians, the AMA leaders, had told insurance companies, they were absolutely not allowed to question physicians in what they were doing, because they were the professionals and the ones with the degree--this is a problem nonetheless for the AMA. Because, how are they going make this political argument that health care doesn't need to be reformed when all these really bad stories are showing up about unnecessary surgeries. And, health care costs skyrocketing. People think that health care costs really just became a problem once Medicare was passed in 1965. But that's not true at all. In fact, as soon as the model starts to take hold, by the end of the 1940s, you already see the cost increases in the health care bucket rising faster than any other category in the consumer price index. So, you already see that something is out of whack. But, insurers and physicians are doing everything they can to expand coverage, in order to keep health care reform--not just because of the Truman Bill. President Eisenhower tried to reform health care. All these Democrats and Republicans in Congress, all throughout the 1950s they are trying to reform health care. Again, because everyone recognizes that this insurance company model is driving up costs. And they are worried that, because it's driving up costs, that not enough people are going to be covered. And also, one of the big criticisms of the insurance company model is: Because it's so expensive, because it's incentivizing physicians to run up care--and I just want to make a little side note that I'm not trying to beat up on physicians. They are behaving very rationally. I'm not saying that unnecessary surgery is nothing--it is absolutely fraud. But, in other cases of overutilization within the offices and such, it's very easy to rationalize, 'Hey, I'm just giving them the gold standard of care. It's what I'd give my child, or my family member--if resources were unlimited, of course I would do this.' That's completely understandable. I don't want to make this sound like I'm beating up on physicians. Um, but this is becoming very problematic. But, nonetheless, insurance company--insurance, even though that starts out very meager benefits--like, if you look at an insurance policy in the 1940s, it doesn't offer you much. We would recognize it as being much like what we have today, because you really only get, neh, 60-80% of your hospital costs paid; nothing else. Nothing else out of the hospital. But, because of this political imperative--what the physicians and the insurers think is, 'We've got to race to build this up.' And so, 'Every time we're showing up to testify in Congress, whether it's about the Truman bills, Eisenhower bills, this bill, that bill--we're showing up with the progress report that shows how much we've expanded benefits: so, how much the insurance policy is now covering more and more things. Now we're starting to cover doctors' visits outside the hospital. Now we're starting to cover diagnostic services. Now we're starting to cover preventative medicine. So, we can show up and tell them why they don't need to reform health care. And also always show up, showing that we are covering more and more and more people.' And so, that's how you get this really broken model, expanding to cover almost 80% of the population by the time we get up to 1965 with the passage of Medicare. And it's even really surprising how insurance companies are losing money on this bet, thinking that if they can seek out[?] the government over the short term, over the long term they'll make money. It starts to get really fractious because insurance companies start to get mad about this, and a lot of them are not willing to continue going along with it. But, how they are even, like, subsidizing--using profits from their other underwriting lines, whether it be property/casualty or life, to subsidize what's going on in health care, just to continue expanding this model in order to keep the government out. So, as all this is going on, and in the press it's showing that costs are going up--there's this surgery crisis--the physicians finally have to--have to do something. They can't just keep telling the insurers that physicians get to practice however they want. I might have gone away from your question some, but what I think I'm moving towards now is how the insurance companies start to have to introduce cost containment. And it is a fight from Day One. The battles are fought in localities and states all across the country. In some areas it's harder than others. That's why I do different case studies of different areas in my book. But you have this back and forth. But physicians in the end have to, little by little, gradually, you know, incrementally, it builds up over the decades of insurance companies starting to set up utilization of review committees, to review what physicians are doing. Insurers start to become expert in the practice of medicine. They come up with these, you know, tables--these morbidity tables, during the 1950s, with, you know, over 3000 possible diagnoses and associated symptoms in order to help them start to track what standard treatments are; what that should look like. You know, they start to--health physicians, you can't admit patients to the hospital unless you get our permission. You see how little by little you have the power dynamic slipping. So, it's not the physician is in charge. Little by little, you can see how we get to a point today where your physician, in order to collect the reimbursement from the insurance company, they have to follow, oftentimes, a pre-set treatment blueprint--a standardized blueprint that's been handed to them from the insurance company, that they have to follow regardless of what they think, in order to collect their payment. So, you can see how costs become a problem because of the fee for service model. But, then all our efforts to clamp down on it are very top down. Not coming the direction you want. It's not an organic, grassroots, bottom up thing. It's a very top-down thing, coming through the insurance companies. And then, the government usually--there's the back and forth between the government, where the insurance companies will come up with something and then sometimes the government programs were adopted[?] such as the diagnostic-related groups, that they figure out a paying set fees to hospitals--they start to adopt that. And then, in the Medicare and some of the Medicaid programs in the early 1980s, in order to try to control some of the costs there, that, 'Hey, if somebody comes in with a heart attack, this is the fee you are going to get. You don't get to just run up the bill.' You were talking before about how nobody knows the price of anything in health care. Gosh, just to get hospitals--everything is such a mess, just to get hospitals on standard accounting procedures wasn't something that happened--you know, they are not even talking about that till the 1960s and 1970s. So, there's just no market logic, no economic logic going on at all.

43:33 Russ Roberts: I want to ask about two things. The first is just, I want to point out something; and then I want to take what you've been saying and try to challenge it from a different direction. So, the first thing I want to point out is that--because not everybody knows about this because they're so rare--but there are these centers out there now that take no health care insurance, take no government payments. They just take cash--I mean, you can use a credit card or a check. But they don't do any paperwork. You get a bill and--they send you a bill and you pay it. And they post their prices: A hernia is this much; a new knee is this much; you need a hip replacement it's this much. And they are out there. There's a few of them. I don't know how many there are. But there are these real market things, where there are real prices: That's what you pay. Now, if you are poor, I think they give some charity relief for certain people, maybe, certain types of surgery. But it's just a private, outside-of-the-system thing that's going on. Christy Ford Chapin: Yes. You are starting to see a backlash, amongst physicians. A lot of them are very much dismayed by what the insurance company model has meant--that now the insurance companies are supervising them. And all the paperwork, and all the administrators they have to hire. And all the time they have to put in to filling out this paperwork and answering to the insurance companies. They are starting to see a backlash. The problem with some of it is that most of us purchase our health care through our employer. Another added, big complication. As I try to explain to my students: 'Could you imagine just knowing that you are going to get your car through your employer, and that's part of your salary?' And you get, you know, two different models: A Ford Fiesta or a Toyota Camry, and you don't get to pick the color, or, unless you are at a Fortune 500, maybe. You get to pick from[?] three cars. How that just really roils[?] these markets in what is offered. So, what is even offered to us at the insurance company, our choices are very much limited. Because we're in an employer-provided plan that also, incidentally benefits the middle class and the upper class. In a way it's very much a subsidy--upper class, is very much a subsidy from the government because the government giving our employers tax breaks-- Russ Roberts: yeah-- Christy Ford Chapin: that the fellow who maybe owns his own business or the person who was poor-- Russ Roberts: The smaller business, yeah-- Christy Ford Chapin: They don't get those benefits. Russ Roberts: It's horrible. Christy Ford Chapin: Right. Right. So, this is one of the--the middle class welfare state is--we don't need to get into that now. But that's certainly a thing in health care. Russ Roberts: Absolutely. Yup. Christy Ford Chapin: Certainly demonstrates that--so, these experiments are really exciting, but even just because of a lot of the regulation that's been built up at a state and federal level and ordered to contain costs in the insurance company model, it's preventing these experiments from taking off in a way we would like to see. For example, I know there's one thing that's been getting a lot of attention lately are these physician cooperatives that are very much like the prepaid physician groups I just described earlier where you have physicians practicing together--they [?] individuals paying a set fee to them; there is no insurance company. Usually what people do is they have Catastrophic Coverage, so that if, you know, they get hit by a bus or they get cancer, they have insurance benefits that will kick in after a certain amount. Even the ability to do that is very much delimited by what you get through your employer, what your choices are. Also with the ACA (Affordable Care Act), what counts as insurance, what does not. And also what these doctor groups can do. So, I give you an example: It made a lot of sense; a lot of states passed these regulations saying, 'Physicians can't own their own diagnostic facilities, blood work facilities.' For obvious reasons. They were seeing that some physicians--well, of course, then all their patients got, if they owned a blood--a laboratory--then all their patients got their blood work-ups at that laboratory. Right? So they could bill. Or, if they owned an x-ray diagnostic, or an ambulatory facility, a surgery facility--you could see how their utilization rates would tick[?] up on this. So, it made a lot of sense and a lot of states said, 'Physicians cannot do that.' And, but now that these kinds of regulations that are meant to contain costs in the insurance company model really limit what physicians can do today. Even if they are trying to break out of the insurance company model, they should be able to do all these things. But they can't. So there actually needs to be a lot of state regulation rolled back for these experiments to really flourish.

48:16 Russ Roberts: So, let me play health care economist--a certain kind. Not my kind, but the other kind. They would make the following argument against your, just general story. They would say, 'Look, all these things are true, but they are not really a function of the insurance company model or the government model. These are just--it's the nature of health care. Health care--' and this goes back to Kenneth Arrow's, recently passed away, so his work has been in the news among economists, anyway, where economists pay attention to the news, lately, because he wrote a very influential paper in 1963 that said that health care is not like other markets; it's different. And personally, I'm skeptical about how different it is. But it is different in the following sense: There's a lot of uncertainty around it. And so, as a result, one more test often is a good idea. Now, some tests have costs beyond the monetary. They are invasive; they are dangerous. And so there's a natural tendency, there's a natural feedback loop, to prevent people from doing too much diagnostics for those kind of things. And I've become increasingly skeptical--as has the profession of health care. The medical profession has become increasingly skeptical of a lot of tests that seem like a good idea, but now it turns out that maybe they are not so [?] and good for us. So, there's been a big pushback on that. But, the truth is, that for a lot of things, we just, 'Well, let's do one more.' And so, when I have a good like that, there's going to be a natural tendency to overuse it. And someone has to rein it in. It's either got to be the insurance company, the government rules, my pocketbook--and in which case, if it's my pocketbook, then people would say, 'Yeah, well, then poor people don't get to use as much. That's not so good.' So, I would answer normally, 'Well, we use charities and other ways to help them to be able to afford it.' Which is true. But, it's still going to be the case that for a lot of folks, they are going to be spending other people's money. So, it's one thing to say, 'Well, in 1930, there were these pre-paid groups; you could belong.' But now, we have so much more technology, so much more ability to do one more test. So much more ability to just--you know, try to fix this a little bit better. So many more devices that can go and improve things. Isn't it really difficult to imagine a free market in health care that is going to work anything like the other markets that we know and love? Christy Ford Chapin: Okay. So, I'll take the first point with Kenneth Arrow. And certainty[?], I alluded to earlier that health care markets somehow don't conform--they don't conform to market logic the way other markets do. I'll take the example of, you know, cars are very complicated products. I do not understand anything about them. Are there engines? But, from branding, I do understand that a Honda is going to be a good bang for my buck. Right? Even though I'm very bad--I'm not an engineer. I can't even change my own oil. So, this idea of this information asymmetry--and even taking it to--okay, so you say, 'That's a product. Let's look at a service.' Again, there are mechanisms; there always have been even before the Internet, which is so much more efficient. You know, people knew--people knew who were good doctors and who were not. Actually that's--I'm kind of chuckling about this because in the 19th century, before modern medicine and the widespread acceptance of germ theory-- Russ Roberts: there were no good doctors-- Christy Ford Chapin: They really--they especially--and the hilarious thing about this, though, is that the patients knew this, and acted very rationally--and that physicians were very upset about their competition from, you know, the homeopathic practitioner and the herbalist and the eclectic medical doctor and the midwife, and all these other competitors. But patients were only acting rationally in that, you know, they were probably paying a good deal less. And, you know, the doctor is more likely to kill them. Let's be honest, because the doctors were very much taken with, you know, blood letting and purging and all these other practices. So, patients, they, too, behave rationally; and they know. So, the information asymmetry--I don't--I really do not see that as a problem at all. And certainly, as I was mentioning before, too, even with the pre-paid physician groups, this was something the physicians understood. They wanted to keep physicians--I mean, patients happy, in order to keep their payment at their physician group so they didn't go to another physician group. There were hundreds and hundreds of them around the country. At least 350, by the late 1920. So they were really starting to take off. So, I hope someone addresses the information asymmetry question; and then, and also of course just pointing out that people said that's the exact same argument the doctors made in order to get control over the market and do a lot of things that I don't think any economist or anybody concerned about the poor would be happy with. Then, as far as addressing the charity piece, that's always going to be part of anything you discuss with health care. Just because you want to make something more--I think making something more efficient only helps charitable care. We're in a situation now with Medicaid--I've been rather dismayed to see people picking up on this idea, rather recently--I think it was Bernie Sanders with Medicare For All. And I would argue that's problematic, because the Medicare program is built on the insurance company model. But Medicaid For All is even more problematic, because you are looking a system where patients don't have a lot of access to physicians, and hospitals. [?] More than half of physicians don't accept Medicaid because the payments are--man, maybe around 60% of what they would [?] get from an insurance company or under another program. So, charity is absolutely important. It's always been important in health care. Indeed, a lot of the physicians I interviewed who were practicing--I even interviewed a physician who was practicing in the 1940s. I had to get to these older gentlemen before they passed away. But, I talked to physicians who were practicing in the 1940s and 1950s and 1960s; and I knew they gave a lot of charitable care. But I was shocked at how much charitable care they gave. How many of their bills that they assumed they would write off--anywhere from 30-50% of their bills. That they just knew. They even had sliding scale systems where they would charge the rich higher prices, and such. No matter what they did-- Russ Roberts: Their memory may have erred in the direction of thinking of themselves as better people than they actually were. Christy Ford Chapin: Yeah, exactly-- Russ Roberts: You want to take that with some grain of salt. Christy Ford Chapin: Exactly. But I was struck by the amount that every single one of them told me this: that it wasn't just one of them, but that I got this amount from all of them. And a lot of things they didn't even intend to be charitable care became charitable care. It's not like today where you are tracked by your Social Security number and everybody knows who you are. I'll also mention that it was very easy for people to pass themselves off as somebody, and even if they didn't want it to be charitable care--so, it might not have all been purposeful.

55:44 Russ Roberts: It does raise an interesting question, right? Which is: While I'm as big a fan as I think anyone of the power of prices to steer resources, this is one area where, for a variety of reasons--it's related to life and death; sometimes it's actually life and death--and it's important to remember that a lot of health care is not remotely about life and death. It's about a little more comfort sometimes, less pain, some reducing some uncertainty. A lot of our medical expenditures are not life and death. But some of them are. And as a result, we do have a lot of emotion around them. And, if you're giving away 25 or 30 or 50% of your health care on charitable grounds, then prices and rationing--you are rationing through your own conscience, generosity, whatever: cultural norms. So, it is a world where it's not--some of the effectiveness of the price system may not come into play even in a world with a lot less government. I think that's important to concede. And I think the other part of this--it's not so much the asymmetry of information. It's the amorphous nature of the product. Which is at least what I think the folks on the other side would say. They'd say: Look, it's one thing to say 'I want this tumor removed.' 'I want this bone set.' 'I want this hernia repaired.' These are straightforward things where you can actually have a price. But, a lot of the medical care that we want, is, 'I'm scared about this pain.' Or, 'This is bothering me and I don't know what it is.' And we might not know what it is. It might not be easy to find out what it is. So, those are the areas where I think--I think there are market solutions to them, obviously. And I think there's got to be some kind of rationing, whether it's through price or whether it's the physician saying, 'Look, we can't do anything more for you.' But, it is a little bit of a funky product. Christy Ford Chapin: Right. And I want to make it extremely clear that I'm all for us having a safety net in health care. But what people, I think anybody who is looking to structurally[?]-- Russ Roberts: You're not [?] crazy like I am. That's good. Christy Ford Chapin: Yeah. Right. No, actually I do want a robust system of care for people who can't afford it. But that doesn't mean that you don't say there's a lot--for Progressives there's a lot better way to fulfill a Progressive vision of charitable care than Medicaid. I mean, that should be problematic for them--that they want to put people--a system that they wouldn't want to be in, I wouldn't want to be in. Don't we want structural reform in a way that says, 'Here's a better system, where prices have been brought down, so that what is offered is generous? reasonable?' Obviously, yes. People with, you know, millions of dollars might be able to get care that I cannot get as a middle class person or a poor person. But I still think it's--especially, gosh, looking at structural change is especially important for our poor people, because they are the ones who get left over--with the dregs of what's left over. And again, if you put--we're looking at a system where physicians are trying to go back to these co-ops, where they actually own them. There's still a lot of talk--for example, ACA has some demonstration projects with co-ops and stuff. Those were really what I would call faux co-ops. They were not at all--some of the experiments, we've seen that doctors own and manage and run themselves. They were basically just ways to get insurance and Kaiser plans more power over doctors. They were not at all like this system I'm talking about. Or even, like, these concierge medicine-type experiments that are developing and becoming larger. But, those systems, as they bring down prices and they bring physicians back into the excitement of the art and the science of medicine, you'll see all kinds of innovations that we can't even conceive of, and that would be fantastic for poor people who are on a basic health insurance program provided by, say, subsidies that they choose, the co-ops that they belong to and then have some have some type of comprehensive insurance plan.