Academic Articles Licensure

Physician licensure and quality: Part VI

On February 4th, I wrote on the American Medical Association’s (AMA) role in modern medicine. Today I will give further commentary regarding the AMA by reviewing a seminal paper by Reuben Kessel (1958). The paper describing the AMA’s development in the first half of the twentieth century.

The AMA has two main goals: 1) a “suitable preliminary education” for all physicians and 2) “uniform elevated standard of requirements for degree of M.D. should be adopted by all medical schools in the United States” (Flexner Report). These goals amounted to the licensure of physicians and the accreditation of medical schools. The first goal of physician licensure was achieve gradually over time at the turn of the nineteenth century. The second goal took longest to achieve.

In 1904, the Council on Medical Education was founded. The group was dedicated to improving the quality of medical education. In 1906 the council inspected 160 medical schools in existence at the time and found that only 82 complied with their standards. Since this study was commissioned by physicians and preformed by physicians, it was not deemed to be unbiased. Thus the AMA looked to the Carnegie Foundation to repeat the study. In 1910, Abraham Flexner concluded his similar study and published what was later to be known as the Flexner report. This report “…convinced legislators that only the graduates of first class medical schools ought to be permitted to practice medicine and led to the delegation to the AMA of the task of determining what was and what was not a first class medical school.” Over the next 35 years, the United States saw a drastic decrease in the number of accredited medical schools.

Year No. of Med Schools U.S. Pop (m)
1906 162 85.5
1920 85 106.5
1930 76 123.1
1944 69 138.4

Creating a cartel

According to the Kessel paper, the aim of the two goals was to establish a cartel. Cartels usually function best when there are a small number of producers; the physician market is made up of many small producers. The question remains how one would enforce a cartel to maintain artificially high prices with so many individuals who could defect.

Kessel claims that a combination of 1) severe threats 2) restriction of consumer access to information and 3) informal associations led to the permanence of this cartel. Individuals who tried to cuts prices (e.g.: those who used a prepaid model of medicine) were often banned from using hospital facilities in the area.

The Farmers Union Hospital Association in Oklahoma, the Kaiser Foundation of San Francisco and Oakland, Group Health of Washington, Group Health Cooperative of Puget Sound, Civic Medical Center of Chicago, and the Complete Service Bureau of San Diego all attempted to charge fees independent of patient income to create a more competitive environment. Physicians participating in these organizations were often banned from practicing in local hospitals or attending professional conferences. The banning of hospital privileges severely crippled many of these organizations who did not have their own comprehensive hospital facilities.

The second means to enforce the cartel was to restrict the information given to consumer. Advertising promoting the medical profession as a whole was allowed, but advertising promoting a specific doctor was prohibited as this would likely increase competition.

The third manner in which the cartel was enforced was the creation of an in-group mentality. Few minorities (especially Jews and African Americans) were allowed into medical schools in the first half of the twentieth century. Finally, free medical care was provided to fellow physicians and their families, and criticism of one’s peers was not tolerated.


Since the time of the Kessel paper was published, much has changed in medicine. Large organizations such as HMOs are able to negotiate price discounts from physicians and thus reduce the market power of physicians. Members from nearly all races and religions are represented in the ranks of medical professionals. Nevertheless, it is important to review the history of the development of modern medicine in order to better comprehend its roots and find new avenues through which health care can be improved.

  • Kessel (1958) “Price Discrimination in Medicine” J Law Econ, vol 1, pp. 20-53.