Excerpt from The Medical Monopoly: Protecting Consumers
or Limiting Competition?
Subsidies and the Medical Monopoly
In addition to using government to restrict competition,
the medical monopoly also turns to government for subsidies.
For example, most physician training is subsidized by
the federal government.
In 1927 student fees accounted for 34 percent of medical
school revenues.(124) Today less than 5 percent of medical
school revenues comes from tuition and fees. Instead,
medical schools rely heavily on federal and state support.(125)
In 1992 total medical school revenues amounted to $23
billion.(126) State and local governments provided $2.7
billion.(127) The federal government paid at least $10.3
billion to medical schools and hospitals for medical
education and training (Table 3). Additional revenues
were obtained from charges for services, endowments,
and private grants.
Taxpayer Support for Physician Education and Training,
Sources: Fitzhugh Mullan et al., "Doctors, Dollars, and
Determination: Making Physician Work-Force Policy," Health
Affairs Supplement (1993), p. 142; and Janice Ganem et
al., "Review of U.S. Medical School Finances 1992-93,"
Journal of the American Medical Association 274 (1995):
Billions of Source Dollars
Federal research, training, and teaching 5.1
State and local governments 2.7
Medicare payments to hospitals represent the largest
source of federal funding for medical education and
training.(128) Medicare pays for physician education
and training in two ways: First, hospitals receive direct
payments from Medicare based on the number of full-time-equivalent
residents employed at each hospital. Second, Medicare
increases a hospital's diagnostic-related group payments
according to an "indirect" medical education factor,
based on the ratio of residents to hospital beds.(129)
The average Medicare payment to hospitals was more
than $70,000 per resident for both direct and indirect
education subsidies in 1992. An estimated 69,900 full-time-equivalent
interns, residents, and fellows were eligible for Medicare
reimbursement in 1991.(130)
Medicare paid hospitals $1.6 billion for direct medical
education expenses and dispensed $3.6 billion for indirect
medical education adjustments in 1992.(131) Of the total
$5.2 billion that Medicare paid to hospitals for training,
approximately $0.3 billion was appropriated for training
nurses and allied health professionals.(132)
Medical schools and teaching hospitals receive additional
federal funding from the National Institutes of Health,
the Department of Veterans Affairs, the Department of
Defense, and the Health Resources and Services Administration
(Title VII) program. Federal funding for research, training,
and teaching amounted to at least $5.1 billion in 1992.(133)
That money was awarded to medical schools and affiliated
hospitals in the form of grants and contracts.
Supporting biomedical research in medical schools
is one way the federal government supports medical education
without appearing to do so directly.(134)
As Feldstein has pointed out, "There is no reason
why medical students should be subsidized to a greater
extent than students in other graduate or professional
That point has also been suggested by Uwe Reinhardt,
a professor of political economy at Princeton University,
who recently noted, In the context of academic medicine,
this inquiry should begin with the question of why the
education of physicians is now so heavily supported
with public funds, when similar support has never been
extended to other important professions, for example,
students in law schools or graduate programs in business.
. . . In truth, the case for the traditional heavy public
subsidies to medical education and training has simply
been taken for granted . . . it never has been adequately
A less direct form of subsidy is the ability of the
health care establishment to direct government payments
from the Medicare and Medicaid programs to "approved"
providers and hospitals. As already discussed, chiropractors
and other nontraditional providers have generally been
excluded from Medicare reimbursement. Furthermore, in
order to be eligible to participate in Medicare, a hospital
must be accredited by the Joint Commission on Accreditation
of Health Care Organizations (or the American Osteopathic
Association in the case of osteopathic hospitals). The
JCAHO, which the Wall Street Journal describes as "one
of the most powerful and secretive groups in all of
health care,"(137) is a private organization with a
board dominated by members representing the AMA and
the American Hospital Association.
As several medical economists studying the issue have
warned, in as much as Medicare is a major source of
hospital revenues, "the influence of the JCAHO can be
used to limit hospital competition and to protect physicians
[against competition] from other groups of providers
by denying them access to hospitals or influence within
hospitals."(138) Thus the medical monopoly is able to
use federal funds to reward its members and restrain
(124) Medical school revenues totaled $11,983,863
in 1932. Sources of income were as follows: student
fees, $4,057,304; endowment income, $2,784,527; state
and city, $2,574,973; and other, $2,567,059. Lowell
et al., Table 104 and p. 283.
(125) Uwe Reinhardt, "Planning the Nation's Health
Workforce: Let the Market In," Inquiry 31 (Fall 1994):
250-63; Janice L. Ganem et al., "Review of US Medical
School Finances, 1993-1994," Journal of the American
Medical Association 274 (September 6, 1995): 724, Table
(126) Janice L. Ganem et al., "Review of U.S. Medical
School Finances," Journal of the American Medical Association
274 (1995): 723-30.
(127) Mullan et al., p. 142.
(128) Congressional Budget Office, Medicare and Graduate
Medical Education (Washington: Government Printing Office,
1995), p. 10.
(130) Mullan et al., p. 143.
(132) Ibid., pp. 142-43.
(133) Ganem, p. 724, Table 1.
(134) Kovner, p. 73.
(135) Feldstein, Health Policy Issues, p. 189.
(136) Reinhardt, pp. 253-54.
(137) "Prized by Hospitals, Accreditation Hides Perils
Patients Face," Wall Street Journal, October 12, 1988.
(138) Sherman Follard, Allen Goodman, and Miran Stano,
The Economics of Health and Health Care (New York, Macmillan,
1993), p. 583.