The Answer Is Transaction Costs

Transaction Costs Killed the Medical Stars

• Michael Munger

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We try to make sense of a real problem many of us feel: paying a lot for U.S. healthcare while still waiting months to see a doctor. We trace how engineered transaction costs, from the Flexner Report to modern residency caps, restrict physician supply and protect price power while leaving clinicians overworked and patients stuck. 
• getting “fired” by a health system and what it reveals about access 
• why shortages don’t clear when prices rise, and how transaction costs block entry 
• the Flexner Report as quality reform and supply restriction 
• evidence of conflicts of interest and rushed methods behind the Flexner narrative 
• Ruben Kessel’s puzzle on persistent price discrimination in medicine 
• hospital privileges and county medical societies as cartel discipline 
• why advertising bans and professional norms can function as anti-competition tools 
• how residency caps and accreditation keep the bottleneck in place today 
• a listener letter on data center payments as compensation versus bribes 
• book of the week recommendation and a few parting thoughts 

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As I note in the episode, thanks to Dr. Lance Stell, Davidson College Department of Philosophy (emeritus).  Lance offered this note about the epidsode:

There's a footnote to the Flexner report. It killed the Davidson medical college - NC"s first. The school was founded by a DC faculty as a proprietary school. After 10 years operating on campus, it moved to Charlotte where it had a clinical relationship w/ the Good Samaritan Hospital - a black hospital, becoming the first medical school in the country to have such a relationship. I can send you an article about it written by Dr. Eddie Hoover, MD, a surgeon and Editor of NC"s black medical journal. Flexner execrated proprietary medical schools and it was his goal to "close them." His damning review of the Davidson medical School, renamed The NC Medical College, was successful.

Thanks, Lance, I did not know that!  I added that link, below. 

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Links:

Earliest source I could find for the TWEJ:  https://www.netfunny.com/rhf/jokes/old89/godplay.840.html

PA data center story: https://www.thecentersquare.com/pennsylvania/article_3b615fd8-5d36-45c4-bfb6-4a3162104f0b.html

Book-o-da-week:  Daniel Hannan, Inventing Freedom, Broadside Press. https://www.amazon.com/Inventing-Freedom-English-Speaking-Peoples-Modern/dp/006223174X/

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz 


The Appointment Shortage Shock

SPEAKER_00

This is Mike Munger, the knower of important things, from Duke University. If you've tried to get a doctor's appointment lady lately, you may have had trouble. You call, the next available slot is six weeks out. If you need a specialist, it might be six months. That makes sense in a UK National Health Service system, because healthcare there is free. But then they ration by queuing. As Tidy C fans know, that's just a different way to charge. As I always note, Starbucks has surge pricing. It's called standing in line. But this was different. Duke Medicine actually fired me. My doctor left the system and I tried to find a new doctor. Called four different offices that said they were taking new patients, but they weren't. Called the main scheduling office. Finally the woman took pity on me. Look, there are no doctors. Duke can't find enough doctors. You're good you won't be able to get an appointment for at least three months. Well, since I needed to be seen for a minor but urgent problem sooner than that, I accepted Duke's decision to fire me. And I looked elsewhere. Remember, this is not the National Health Service. You're paying a fortune for insurance, and to be fair, the insurance company is then paying a fortune for your care. How can there not be enough doctors? If there's a shortage, the solution must be to raise the price. So aren't doctors just underpaid? Well, not so fast there, Sparky. The answer is well, you know. Straight out of Creedmoor, this is Tidy C.

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I thought

Why More Pay Doesn’t Mean More Doctors

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they talk about a system where there were no transaction calls, but it's an imaginary system. There always are transaction calls.

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When it is costly to transact, institutions matter. And it is costly to transact.

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Why doesn't the supply of doctors respond to the demand for doctors the way the supply of, say, accountants or software engineers responds with a lag to demand for those professions? The answer is transaction costs, but in this case, the frictions aren't accidental. They were engineered by one of the most craven, selfish, and destructive rent-seeking groups in U.S. history. And the engineering job was so thorough, so clever, and so well disguised as public service that it became the template for professional licensing across the American economy. The flower arranging industry in Louisiana is trying to copy this group. I'm going to spend some time today on three documents. Together they tell one of the most extraordinary stories in the history of the economics of regulation. The first is a famous 1910 report that's credited with transforming American medicine. The second is a 1999 article by a medical student who decided to investigate the investigator of that report, to examine the examiner, if you will. And the third is a 1958 paper by economist Ruben Kessel, published in the very first volume of the Journal of Law and Economics, an article that lays out the full economic logic of what happened. It's actually one of the great works of applied economics and transactions cost of the 20th century, but almost nobody outside a few graduate seminars has read it. I'm not saying you need to read it. Well, okay, that's what I'm saying. You should read it. But before I take up the Flexner report, a caveat. I'm going to be critical of the U.S. medical establishment, but let's cut some slack to the actual medical professionals that are caught in this mess. Many of them are paid quite a bit, but a few of them are leaving the profession or at a minimum switching sectors. We raise pay, but we prevent the usual consequence, which is more people moving to the profession. The result is that the actual frontline healthcare workers, especially doctors, nurses, and emergency personnel, may be underpaid given the stresses, overtime, and unreasonable expectations that are placed on them. They are victims of this system, not the villains.

Flexner And The Medical School Purge

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Well, the Flexner Report. The year is 1910. American medicine is a mess, or at least that's what you're about to be told. There's 155 medical schools operating in the United States and Canada. They range from rigorous university programs to fly by night diploma mills. Some have proper laboratories. Some have signs that say laboratory instead of laboratories. In Steps Abraham Flexner, commissioned by the Carnegie Foundation for the advancement of teaching to evaluate every single medical school on the North American continent. His report, published in 1910 and known ever since as the Flexner Report, caused, as Flexner himself later put it, a rattling of dead bones, such as never been heard in this country before or since. Newspapers ran front page stories. Medical schools collapsed. The whole landscape of American middle education was transformed within a generation. Now here's what Flexner found, or more accurately what he claimed to find. He described one school's equipment as, and I'm quoting here, dirty and disorderly beyond description. He found anatomy departments located in outhouses, with the smell of decaying cadavers drifting across the campus. He found institutions that had, in his phrase, laboratory signs rather than actual laboratories. The press loved it, of course. The language was vivid, the targets were easy. Nobody wants to defend the anatomy outhouse. But here's the first thing I wanted you to hold in your mind. Abraham Flexner was not a doctor, he was not a medical professional of any kind, he was an unemployed former schoolmaster, who, by his own admission, mostly just needed a job. He had never set foot inside a medical school and had no knowledge of anatomy, physiology, or psychology. He was, in his own words, keenly conscious of his ignorance and inexperience. Sir William Osler of John's Johns Hopkins, probably the most eminent physician in America at the time, reviewed Flexner's later analysis of the clinical situation at Hopkins and said it showed a very feeble grasp of the clinical situation. And that wasn't surprising given that Flexner lacked all the necessary training. Osler said he couldn't tell whether unfairness or ignorance was more prevalent in the analysis, but in either case, gross injustice was done because this report was taken seriously. Flexner's methods were, well, brisk. He inspected, he said, 155 schools all around North America in about 180 working days. That includes travel time across a continent. At some schools, he toured the facilities without any school officials being present. At one institution he found the janitor and bribed him to open the laboratories, discovered that the rooms contained only desks and chairs, but no apparatus, and concluded it was summer. The school lacked equipment entirely without considering that equipment, especially expensive equipment, might be stored away during the summer, in cabinets, or that schools like all institutions sometimes put things away when they're not in use because they might get broken.

A Rushed Report With Hidden Backers

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The historian Mark Hyatt, writing in 1999 in a wonderful article called Around the Continent in 180 Days, documents all this in careful, sourced detail. Hyatt notes that Flexner himself later confessed to using no standard questionnaire and no fixed method of procedure, while simultaneously claiming to promote professionalism in the scientific method. Flexner's response to these charges was disarming in its candor, but not very persuasive. He said, inconsistency never bothered me. And then he said, You don't need to eat a whole sheep to know it's tainted. That's a delightful metaphor for a medical school. Now, Hyatt's article was not merely an ad hominem attack on Flexner. The deeper point is about motive. Why was this investigation conducted in the first place? Who commissioned it, who collaborated on it, and who benefited from its conclusions? The answer to all three questions is the same. The American Medical Association, in concert with the Rockefeller Philanthropies and the Carnegie Foundation. The trail of evidence that Hayek traces is damning. Council records of the American Medical Association document for a meeting in December 1908, New York, at which Flexner and the Carnegie Foundation's president, Henry Pritchett, met with AMA officials to plan what was supposed to be an independent investigation. The records show that the parties agreed, explicitly agreed, to conceal the collaborative nature of the exercise. That is, the AMA was hiring someone that was friendly and knew what they were supposed to find. Pritchett wrote to a colleague that the report would, quote, be and have the weight of an independent report of a disinterested body. And it did because they didn't tell anybody it was internally commissioned. The Journal of the American Medical Association later praised the report for being produced by an agency outside and independent of the medical profession. Well, it was really, really outside of the medical profession. This guy was an unemployed school teacher. You can't get more outside than that. It's almost breathtaking. The AMA praised as an independent scientific report a report that it had secretly co-authored by a moron. And what did the report can recommend? Here's where it gets interesting from a transaction cost perspective. Flexner called for reducing the number of medical schools from 155 to 31 and cutting the annual production of physicians from around 4,400 to 2,000. He argued there was an enormous overproduction of doctors since society would be better off served by fewer, better trained physicians. Well, that conflaints the issue of quantity and quality in a way that would turn out to be most unfortunate. Now I want to pause here and ask the obvious question. If you're a physician in 1910 and someone proposes cutting the number of new doctors produced each year by more than half, how do you feel about that? Well, you feel great. Your income goes up, competition goes down, the market power of your services increases. So remember, Henry Pritchett was the president of the Carnegie Foundation. Hyatt, the later author, quotes Pritchett's own introduction to the Flexner report, which states that reducing the supply of doctors will help existing physicians make a competent livelihood, and that none deserves so much of society as those who have taken upon their shoulders the burden of medical education. Well, that's not a public health argument. That's a guild argument. That's the same argument that medieval stonemasons made for restricting the number of stonemasons. And so notice that normally when you say we should raise the salary of a profession, that means we'll get more of them. What they were saying is we should have fewer of them so we can raise their salary. Well, the consequences were severe, long-lasting, and unequally distributed. Between 1900 and 1930, the ratio of physicians to population fell by 20%. The seven medical schools specifically for black physicians in 1900 were recommended to be reduced to two. Flexner considered the other five ineffectual and of no value. He also asserted, without evidence or even a coherent argument, that there was no need at all for medical schools devoted to training women, recommended closing all three. Between 1920 and 1964, fewer than 3% of students Americ entering American medical schools were African American. The Flexner Report didn't create American medical apartheid, but it codified it and entrenched it for half a century by eliminating all of the successful schools that had been started for black doctors. So Hyatt's contribution is to show that the famous founding document of modern American medical education, the Flexner Report, was a rushed, methodologically casual, conflict of interest riddled work of advocacy, masquerading as independent science by someone who had no training in science. The reforms at Spark may have eliminated some genuine diploma mills, that's true. It also served the American Medical Association's rent-seeking interest in restricting supply, and it did so while wearing the costume of progressive era expert authority.

Why Price Discrimination Doesn’t Collapse

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Now let's turn to Ruben Kessel. Fast forward to 1958. Kessel is an economist at the University of Chicago. He's going to take the story that Hyatt tells in retrospect and shows how it's not merely a story about one biased report, but about a systematic, rational, and economically coherent structure of monopoly control by the AMA. Kessler's paper is titled Price Discrimination in Medicine. It was published in 1958 in the inaugural volume of the Journal of Law and Economics. It begins with a puzzle. Everyone knows that doctors charge different patients different prices for the same service. Wealthy patients pay more, poorer patients pay less. This practice is so well known that it had already become, by 1958, the standard textbook example of discriminating monopoly. But Kessel points out that the textbook treatment is incomplete. If a doctor is a discriminating monopolist, she should charge rich patients more and poor patients less. Fine. But then a second doctor should look at that situation and say, I can steal the rich patients from my competitor by charging them slightly less. Competition among doctors should therefore erode price discrimination if it's economically based and push everyone towards a uniform price. It's basic economics. Price discrimination in a competitive market is unstable because it creates arbitrage opportunities. And yet, price discrimination in medicine has persisted for decades across hundreds of thousands of independent practitioners without eroding. This is Kessel's puzzle, and it's a genuine one. Something is preventing competition from doing what competition normally does. What is it? The AMA's own explanation, which Kessel recounts and then demolishes, is that doctors discriminate on price out of charity. They're not charging rich patients more, they're charging poor patients less. It's a noble story, but Kessel asks some inconvenient questions. First, why does this charitable impulse appear in medicine but not in dentistry, nursing, and any of the other closely related health professions? Dentists don't systematically charge rich patients more to subsidize poor ones, and they generally can quote a price. Nurses don't do that. If the logic were about medicine's unique importance requiring charity, you'd expect it to extend to adjacent services. For the most part, it doesn't. Second, doctors don't charge each other for medical care. If this were about charity, doctors, who after all have high incomes, would charge each other more than full price under the sliding scale. Instead, they pay nothing, nothing. Professional courtesy is actually the opposite of charity. Third, quoting, this is from Ruben Kessel's article, for those who do and those who do not have medical insurance, prices are different. If the maximizing hypothesis of economics is correct, then fees for those who have medical insurance ought to be higher than for those who do not have insurance. Existing evidence indicates that if income and wealth differences are held constant, people who have medical insurance pay more for the same service than people who do not have such insurance. Union leaders have found that the fees charged have risen as a result of the acquisition of medical insurance by their members. Fees, particularly for surgery, are higher than they would otherwise be if the union members were not insured. Members of the insurance industry have found that the greater benefit provided by the certain the higher the surgical bill. This suggests that the principle being used for the determination of fees is what the traffic will bear. Obviously, fees determined by this principle will be highly correlated with income, though income will have no independent predictive content for fees if the correlation between income and what the traffic will bear is abstracted. End quote. Well, that's complicated. What he's saying is that if it were charity, then there wouldn't be a difference based on the ability to pay. You would just give free care to the indigent. But if uh union members don't have insurance and then they get insurance, then the uh fees that they're charged by doctors suddenly goes up. And it's only because they got wealthier, or that that is they are able to pay more. So this is just standard price discrimination. It's not charity. Price discrimination means you charge the wealthy more. Charity means you charge the poor less. And it can look the same. The determining factor is the cost of care. But what is cost? Marginal? Average? You can't possibly use marginal cost pricing. Suppose I'm a doctor. I already have my degree, experience, building, lab, test equipment. At the margin, the cost of seeing you for 20 minutes and administering tests of blood pressure, metabolic panel is less than $100. But I have to pay for my degree, the lab, all the staff. What is cost? I have to cover my average cost. And in many cases, I have to charge more than the average cost, and I will do that based on ability to pay. Fourth, and most devastatingly, from Kessel, when medical insurance becomes widespread, what happens to fees? Well, under the charity model, insurance doesn't change anyone's income. What Kessel documents in 1958 is that the fees charged to insured patients are systematically higher than the fees charged to uninsured patients with the same income. Insurance increases the patient's ability to pay, but makes them less concerned about it because it's not coming out of their pocket. In technical economics terms, that means they are less price elastic. If you have insurance, you're quite price inelastic. You don't really care what the price is, and so prices go up to match. That's not charity. That's charging what the traffic will bear. That's pure rent seeking. So the charity story is false, or at least deeply incomplete. The actual story, Kessel argues, is that medicine is a discriminating monopoly, a cartel that has successfully maintained price discipline across hundreds of thousands of independent practitioners for generations. The key question is, how do you maintain a cartel that large for that long? Industrial cartels with a dozen members usually fall apart in just a few years. Each member has an incentive to defect and cut prices. How do you maintain discipline across an entire profession? The answer, Kessel shows, is through the control of hospital access.

Hospital Privileges And Cartel Enforcement

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Here's the mechanism. Doctors need hospitals, particularly surgeons and specialists, but really almost all practicing physicians. Hospitals need to be approved by the AMA to train interns and residents, and those approvals are contingent on the hospital restricting its medical staff to members of local county medical societies. County medical societies are, for all practical purposes, private clubs. They set their own membership rules with essentially no external oversight. No membership of county medical societies, non members of county medical societies cannot join hospital staffs. Doctors cut off from hospital access cannot effectively practice medicine in most specialties. Therefore, if you expel a doctor from the county medical society, you have partially revoked their license to practice. This threat is available against any doctor who violates the price discipline. Cut prices to attract patients, advertise, you lose your hospital access. The sanction is severe enough and the AMS control of the chain complete enough that hundreds of thousands of independent physicians can be kept in line. Kessel then walks through the evidence for this mechanism with a series of case studies that are almost novelistic in their drama. He examines what happens to every organization that tried to offer prepaid, nondiscriminatory medical plants, where fees are independent of income. The Farmers Union Hospital Association in Elk City, Oklahoma, founded by a doctor named Michael Shadid, offered prepaid care to its members at flat rates. The local county medical society dissolved itself and reconstituted as a new organization, simply in order to exclude Shadid from membership. When that didn't stop him, he had his own hospital. Organized medicine used its control over license to take over his to try to take away his license to practice. Only Shadid's shrewd alignment with the politically powerful farmers union and ultimately the intervention of the state governor saved him, but that's an isolated case. Very few doctors have that kind of political power. The Kaiser Foundation in California built its own hospitals and offered prepaid care. Its physicians were excluded from county medical societies in retaliation. The plans medical director, Sidney Garfield, was tried by the State Board of Medical Examiners for unprofessional conduct. Had his license suspended. And was placed on probation, all subsequently reversed by the courts, but not before years of legal battle when he was unable to practice medicine. So the medical establishment, the AMA and its local units, are desperate to prevent the ability to stop this profit maximizing price discrimination. Another example, Group Health of Washington, D.C., which is now Kaiser Permanente in the Mid-Atlantic region, didn't have its own hospital. When its doctors were ejected from the District Medical Society, virtually all hospitals in D.C. were pressured into denying them staff privileges. Doctors were deterred from joining Group Health out of fear of retaliation. Other doctors who were already on the Group Health staff discovered convenient employment opportunities elsewhere and resigned. Group Health was only saved because it was in Washington, D.C., therefore under federal jurisdiction, which allowed the Justice Department to bring a successful criminal antitrust case, a successful criminal antitrust case against the American Medical Association and the District Medical Society under the Sherman Act. And the Supreme Court upheld the convict the conviction. So doctors are routinely acting as an actual monopoly under the Sherman Act. And in this case, because it was under federal jurisdiction, it was found to be true and broken up. In Oregon, in Chicago, in San Diego, Puget Sound, everywhere there's ever been a prepaid non-discriminatory medical plan. The same pattern appeared: exclusion from county societies, denial of hospital privileges, attempt to revoke licenses, lobbying for state legislation to make prepaid plans illegal. In 1954, at least 20 states had passed legislation instigated by the medical societies designed to prevent prepaid group practice and keep medicine on a fee for service basis so that doctors could charge more. Kessel also explains through this framework a series of other medical customs that had previously seemed puzzling or merely cultural. Why do doctors never publicly criticize each other's work? Because doing so would undermine the in-group solidarity that the cartel needs to function, and because a doctor who testified against a colleague in a malpractice suit would then find himself barred from hospital staffs. One California case involved a doctor who acted as an expert witness in a malpractice suit was subsequently excluded from every hospital in the state. Why is advertising by individual physicians prohibited? Because advertising by individual doctors would enable price cutting and market share competition among producers. Advertising by the profession as a whole is fine. It increases total demand, but advertising by particular doctors or groups redirects demand, which is exactly what price cutting would look like, and that's what the medical establishment is desperate to prevent at all costs. They have to try to keep prices not only high but rising. It's interesting. There uh was a study by Lee Benham on allowing advertising for eyeglasses. I'll put up a link to it in show notes. Uh the the few parts of the medical services industry where advertising is allowed. Uh eyeglasses and uh LASIK surgery are cases where prices have actually come down and service quality has increased. So allowing the scolding winds of competition is a really great way to uh improve both cost and service. And that's what doctors are desperate at all costs to prevent. And I don't mean individual doctors. Let me say again, I don't mean individual doctors. I mean the medical establishment which views with uh rapacious ownership the overall industry. And so that we're talking about the American Medical Association. Why are specialists overrepresented in American Medical Association governance? Because specialists, particularly surgeons, depend most heavily on hospital access. Therefore, they have the most to gain from maintaining the discriminatory price structure. They are, as Kessel puts it ironically, naturals for the job of monopoly maintenance. And in a section that's jarring to read today, Kessel explains the systematic discrimination against Jewish applicants to medical schools between the 1920s and 1950s using the same analytic framework. The cartel depends on social in-group cohesion to enforce informal price discipline. Groups whose cultural history has inclined them towards vigorous competition and skepticism of guild rules, and Kessel documents the historical reason why Jewish culture developed these characteristics through centuries of exclusion through ordinary economic guilds, represent a higher threat of price cutting. The cartel therefore had economically rational, if morally abhorrent, economic reasons to restrict the admission of Jews. Between 1933 and 1938, as doctors' incomes fell during the Depression and the threat of price competition increased, admission of Jewish applicants to medical schools fell by 30%, against only a 5% fall in overall admissions. The temporal correlation with increased competitive pressure is exactly what the theory would predict. Kessel is careful to say that economic rationality doesn't by itself make these policies morally defensible. They were unjust, but explaining them as an irrational prejudice misses the mechanism that makes them persistent and systematic. Let's take a step back now. The standard economic model says that when there's a shortage of something, prices rise, which should attract more producers, which eliminates the shortage. Why doesn't this happen with doctors? Well, the transaction cost of entering the medical profession are not natural frictions. They're deliberately constructed barriers. The Flexner report, which was commissioned in secret, I emphasize secret collaboration with the American Medical Association and then dressed up as an independent expert, and I emphasize expert, the dude was not an expert, judgment, provided the political and intellectual cover for state legislatures to delegate to the AMA, putting the Fox in charge of the henhouse, the power to certify medical schools. Once the American Medical Association controlled certification, it operated like any medieval guild, controlled the number of doctors entering the profession. The number of medical schools fell from 162 in 1906 to 69 in 1944. Number of medical students in 1958, when Kessel was writing, was only about 5,000 more than in 1910, despite an enormous growth in population and the complexity of medical care and specialization. That's the entire increase in all physicians in the United States, 5,000. And here's the crucial Kessellian insight. The barriers don't just restrict entry into the profession, they restrict competition within the profession. The physician to population ratio can be kept below market clearing levels. That alone doesn't maintain discriminatory pricing. To maintain discriminatory pricing, you also need to prevent individual doctors from competing on price or advertising. The mechanism for that is hospital access controlled through county medical societies, a chain of authority that the AMA built deliberately over decades in such a decentralized fashion that it's very difficult to apply antitrust law to it. But like politics, all medical care is local. The result is a set of engineered transaction costs that block the very arbitrage pressures that would otherwise bring prices down and quantities up. Patients who would benefit from care and physicians who would provide it cannot find each other at prices that would satisfy both parties, not because of any natural friction, but because a third party has deliberately placed institutional obstacles between them. So many mutually beneficial transactions are blocked by these rules. No, this is important. I want to be clear what this analysis does and doesn't say. It doesn't say that all Flexner era reforms were bad. The American medical system before 1910 did have genuine problems. A lot of schools really were inadequate, borderline fraudulent. Higher standards for medical education were warranted. Question is whether the package that actually got implemented using this as an excuse, with its supply restrictions, racial gender discrimination, its destruction of homeopathic and eclectic traditions, its hostility to prepaid care was actually about quality, or whether quality was the costume that supply restrictions wore to this party and then did something very different. Well, Kessel's answer is clear. Raising standards was the public justification. Raising income was the actual motive, and the institutional machinery that was built served primarily the raising of income. There's also a puzzle that Kessel raises and deserves its own episode probably. The AMA fought ferociously against the veteran administration providing free care to veteran, even though this would obviously increase the total quantity of medical care delivered in America. Free care to veterans doesn't threaten prices for non veterans, that is, it's market segmentation. Why fight it then? Because prepaid, nondiscriminatory care anywhere threatens the social acceptability of the discriminatory pricing model everywhere. If people become accustomed to receiving medical care at uniform prices, the ideological basis for charging rich patients more evaporates. Well, where does that leave us today?

The Modern Bottleneck Residency Caps

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The specific mechanisms that Kessel described have evolved. The overt prosecution of prepaid plans is largely gone. Kaiser is now one of the largest health systems in America. The explicit exclusion of Jewish applicants from medical schools ended. African Americans enter medical schools in higher proportions, though still far below their population share. But the underlying structure of physician supply restriction remains intact. The number of medical residency positions, which is the binding constraint, it's the narrow place in the hose on how many doctors can actually practice in the U.S. was capped by Congress in 1997 at 1996 levels. That cap has barely moved since. And again, we've had increases in population and increases in the number of specializations. The supply efficient of physicians is artificially constrained far below what market demand would produce. Meanwhile, the AMA still controls accreditation of medical schools through the LCME. The LCME is the liaison committee on medical education, the accrediting body for the MD granting medical education programs in the U.S. and Canada, sponsored jointly by the Association of American Medical Colleges and the American Medical Association. Its core function is to evaluate medical schools against a set of published standards covering things like curriculum content, faculty qualification, and so on. Accreditation matters enormously in practice. If you graduate from an LCME accredited school, it's generally required for students to be eligible for federal financial aid, to sit for licensing exams, and to enter residency programs. So schools undergo periodic LCME surveys or site visits and self-studies on an eight-year cycle. And the uh osteopaths, the Commission on Osteopathic College Accreditation, does a parallel process. The LCME is a modern descendant of the same regulatory lineage. It's essentially the institutionalized successor to the standard setting function that the Flexner report pushed for in 1910, and it is the gatekeeping role over the supply of accredited medical schools. That is the narrow point. That restriction still influences medical trainings residency training standards and lobbies against policies that would expand the supply of medical care, whether that means recognizing foreign trained physicians regardless of their competence and experience, expanding the scope of practice for nurse practitioners, physician assistants, even for simple things, basically for first aid, or allowing more international medical graduates to obtain residency positions because the number of residency positions is so highly constrained. And there's no reason for that. We need more residents. The prices for medical care continue to reflect the legacy of this architecture. U.S. spends more per capita on health care than any other developed nation. And as I said before, but I want to emphasize I'm not saying doctors are overpaid. They're overworked. In some sense, the amount that we pay for medical care is too high because of the restriction. But that means that the amount of work that doctors, our expectation of what doctors have to do is so high that even though salaries seem enormous, a lot of people are leaving the profession. And it's unsurprising because this cartel harms both the people who have to work in the industry and all of us who depend on the industry for our medical care. A significant portion of that higher medical spending in the U.S. is explained not by superior outcomes, we don't really have those, but by higher physician incomes, which are in turn partially explained by restricted supply. But the physicians themselves are not happy about it because they're grossly overworked and often abused. Ruben Kessel, writing in 1958, concluded his paper with a prediction that in geographic areas where prepaid competitive medical plans existed, price discrimination would be less prevalent. He was right. In California, where Kaiser had established a major presence, competing providers began providing nondiscriminatory service plans in response. Competition worked wherever it was permitted to exist. So the lesson is not that medicine should be like selling gasoline. It's a commodity, where every transaction is purely arm length, there's no professional standards, and quality is purely a buyer's problem. Medicine has genuine information asymmetries and genuine externalities. Regulation, licensing, those are warranted. The lesson is that when you put an industry in charge of regulating itself, you need to be clear-eyed about whose interest that regulation will serve. When the American Medical Association was delegated the power to determine what constitutes a qualified physician, it was, as Kessel put it, on a par with giving the American Iron and Steel Institute the power to determine the output of steel, or the kind of factory where it could be produced. Nobody would accept this arrangement in any other industry. But the medical profession had a secret weapon, the largely fake Flexner report, which gave the supply restrictions the appearance of a public health crusade. Well, the answer is transaction costs. But remember, transactions costs can be natural arising from genuine frictions in the world, or they can be manufactured intentionally, created and maintained by parties who benefit from preventing exchange. The history of American medicine is largely the history of the second kind of transaction cost. And until we understand that history clearly, we won't have the tools we need to dismantle the barriers that continue to make care expensive and scarce, and that make medical professionals miserable. I want to take a moment and credit, but in no way blame, a professor of mine at Davidson College, Dr. Lance Stell, a University of Michigan PhD in political science, who I believe in the fall of 1977 taught me a class of problems in philosophy. That's one of the most memorable and important classes I had created in me a continuing interest in philosophy. And the what I have been talking about here is of particular interest to Dr. Stell, so I want to thank him, but in no way blame him for things that I have gotten wrong. So, Dr. Stell, thanks very much.

The Doctor Joke And God Complex

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Whoa, that sound means it's time for the twedge. I have the canonical doctor joke for you. Those of you who work in health will find this joke boring because you've heard it a hundred times. But it's interesting for the rest of us. Here it is. A doctor died and went to heaven. When he got to the pearly gates he found that there was a long line to get in. He went to the front of the line and told the angel that since he was a doctor and he'd saved thousands of lives, his time was really important, and so he should be allowed to bypass the line and go right in. The angel was very patient. Well, doctor, up here, everyone is equal. Besides, you see that religious leader over there? She saved thousands of souls, which are more important than lives. You really think you should cut in line ahead of her? Please go back to the end of the line, just wait your turn. Doctor grumbled but did what was requested. After a while, someone with a white smock and a stethoscope walked right past the line. The angel waved and said nothing, just let them through. Doctor runs back up to the front of the line to the angel and says, Hey, hey, how come you let that doctor write in and not me? Angel looked back over his shoulder and then he said in a low voice, Well, actually that's God. Sometimes when he's feeling especially powerful, he likes to play doctor. End of joke. Well, of course, sometimes we say doctors like to play God, so this is a humorous reversal on that. The earliest sourced version I can find of this is that rec.humor.funny was a Usenet newsgroup posted by Paul Bloomstein in in apparently 1989, would make it one of the oldest archived versions on the internet, although it was almost certainly in oral circulation before that. And it references the so-called God complex that doctors understandably might have because they're making decisions of life and death. Psychoanalyst Ernest Jones first used the God complex in his essays in applied psychoanalysis. He described it as a narcissistic belief in one's own infallibility and power. So you listeners might plausibly say that economists and well professors generally all suffer from God complex, and that's not true. We do not suffer, we enjoy it.

Data Center Payments Bribe Or Compensation

SPEAKER_00

A letter from SS, who had written in before uh on a different subject. Professor, an attempt to deal with the problem of social cost centers in a $10,000 cash example. And I looked at the link that SS sent, and it's pretty interesting. Let me read the newspaper story. Unsolicited letter from a data data center developer that dangles $10,000 for every household in a northeastern Pennsylvania township, but only if the data center gets built calls the money a grant. But Ed Parks and Ed Negra call it a bribe. The fact the letter is about the marquee project in Governor Josh Shapiro's Fast Track permitting program makes their distaste worse. The two homeowners live in Hazel Township, Luzerne County, and will be among the closest neighbors if the fifteen data center buildings of the Project Hazelnut become a reality. It's ridiculous, said Parks, referring Zoo the letter with the $10,000 offer. They're trying to drive a wedge between Hazel Township and residents who are directly affected by the data center, like myself and people who might live just a couple of miles away. Shapiro went to Lazerne County in late 2024 to publicly announce, that's Governor Shapiro, to publicly announce the Pennsylvania Permit Fast Track Program, intended to streamline permit issuing for high impact economic development and infrastructure projects. As of Friday, nine of the 17 projects shown on the state's public fast track dashboard were data centers. Hazel Township, with slightly more than 10,000 residents, surround the town of Hazleton, Straddles Interstate 81, about 80 miles north of Philadelphia. The recent letter signed by Nathaniel Hegedorn, North Point CEO and founder, began arriving in local mailboxes about a week ago. It referred to misinformation and fear that has circulated about data centers and our project and sought to alleviate. Concerns about water, environment setbacks, light, and power use, that is, rate increases. It also listed potential community benefits like a $145 million payout over 15 years for township initiatives like forming a police department and reducing trash fees. Most eye-catching for individual homeowners, though, was the description of a $45 million direct resident grant fund. It said the grants would be available in each household in the township and could be spent on anything. This $10,000 will be paid to each household on the issuance of the certificate of occupancy of our first data center building, the letter from Hagadorn said. So on Friday, a spokesperson for North Point said letters were sent to all Hazel Township households, total of more than 4,000. So let's say $4,500 people, $10,000 each, that's how they got to forty five million. Quoting, they can't just throw their money around and think they can go wherever they want, disrupting people's quality of life, said Negra, a retired building materials manager for a contracting company. This is a guy who worked for a contracting company. He described the attempted start of the project as sneaky. When people have to resort to bribing people to get something passed, that's what it is. That's pretty poor that that has to happen, Negra said. Parks said people in the well established community volunteer and they donate money for causes in nearby Hazleton. Well then. Living in the beautiful wooded area for many is the payoff after a lifetime of work and planning. How can you put a price on your well being? She said. Her husband, a retired software company vice president, was blunt. They're trying to bribe people, Ed Park said. They're being very disingenuous in this letter. Plus, it's not a contract. End of letter. Well, thank you, SS, that's terrific, and there's just a bunch of great stuff in this letter. Um the objection is that they're trying to they're acknowledging that there might be an effect on quality of life and they're compensating you for that. And if they're going to pay all of the four thousand five hundred people who are most affected, I don't see how that's a bribe, that's compensation. It's also interesting that apparently everyone who lives in this area is named Ed, and so they have to refer each other to last names in order to keep track. Um, Ed Parks, being in the neighborhood, is named Ed. Ed Parks said uh they're trying to bribe people, plus it's not a contract. So first he's saying it's wrong to pay them, and second, he's saying, I'm not sure they're gonna pay me because it's not a contract. We can't go both ways, Ed. The fact is that this is a pretty standard attempt to say there are costs that you might suffer, and we're going to offer you a very large amount of money. Now, the fact that in spite of being fast-tracked, it is still worth that much money in order to get the thing cited recognizes the transaction cost of development. And so I will do a future episode entirely on the transaction cost of data centers, and I'll try to include as many different aspects of that as I can. But again, thank you, SS, for this letter. And for that note, I will put up a link to the article in show notes.

Book Pick And Closing Thoughts

SPEAKER_00

Well, the book of the week this week is Inventing Freedom: How the English-speaking peoples made the modern world by Daniel Hannon in 2013 from Broadside Books. Uh, it it perhaps does claim a little bit too much for English-speaking peoples, although there's a history of these kinds of books that say let's look at the contributions of one group. So the the the Irish or the Scots or uh Jews all have books written, and I'm leaving a bunch out. This one I thought was particularly interesting because it looks more at culture than at nationality. It's certainly worth reading, and it's well written enough to be a uh summer reading book. So, how the Inventing Freedom How the English Speaking Peoples Made the Modern World by Daniel Hannon in 2013. Well, that's it for this time. We'll be back next week with another Tidy C.