"The ultimate result of shielding men from the effects of folly is to fill the world with fools." -Herbert Spencer

Saturday, June 6, 2009

Medical licensure

"A scientific academy invested with a sovereignty, so to speak, absolute, even if it were composed of the most illustrious men, would infallibly and soon end in its own moral and intellectual corruption. Even today, with the few privileges allowed them, such is the history of all academies. The greatest scientific genius, from the moment that he becomes an academician, an officially licensed savant, inevitably lapses into sluggishness. He loses his spontaneity, his revolutionary hardihood, and that troublesome and savage energy characteristic of the grandest geniuses, ever called to destroy old tottering worlds and lay the foundations of new. He undoubtedly gains in politeness, in utilitarian and practical wisdom, what he loses in power of thought. In a word, he becomes corrupted." -Mikhail Bakunin


Before constructing a national healthcare system as a means of solving the current American healthcare crisis, it may be wise for United States policy makers to look more closely at the typically neglected issue of medical licensure. State governments regulate over 1,000 occupations through mandatory licensing, professions as different as hair braiding, funeral directing, fortune telling, reptile catching, law, social work, truck driving, and real estate brokering (Summers 42). Regulations establish entry requirements for an occupation, which may include, for example, educational credentials, prior experience, satisfactory performance on an entrance exam, or residency in the state of practice. Further licensing regulations control business practice, among other ways, by placing restrictions on advertising, or by forbidding participation in certain types of commercial firms (Young 29). Proponents of mandatory licensing argue that licensing requirements for certain occupations improve the general quality of service provided by preventing incompetents and frauds from practicing. These arguments are employed most frequently in defense of licensing in the medical occupations, which are among the only thirty-three occupations for which licensing is mandated in all fifty states.

Contrary to this common defense, the bulk of economic research seems to indicate that mandatory licensing does not tend to improve the quality of service received by consumers, and this turns out to be remarkably true for medical services. This is so because of the anticompetitive effects of mandatory licensing, which by design restrict the quantity of professionals and the diversity of services offered; because of the harmful effects of the “Cadillac standard” employed through the practice of mandatory licensure; and because of the monopolistic “club mentality” typical of state licensing boards. In this paper, I intend to outline the economic data relating to medical licensure; to critique both the form and content of the arguments of proponents of the state licensing system; and to advocate superior methods for protecting consumers of medical services from fraudulent doctors, and for increasing the general quality of medical service received.

In studying the effects of mandatory state licensing in the medical professions on the quality of medical services, one needs to distinguish between quality of service supplied and quality of service received. When I speak of the average quality of medical service supplied, I am referring to the quality of the product, healthcare, offered by medical professionals, while ignoring the average quality of healthcare actually consumed by the general population. These two measures of quality are not necessarily equal, as professionals may offer a high-quality service not affordable to much of the population, who will as a result turn to low quality substitutes for professional medical care or forego healthcare altogether.

Carolyn Cox and Susan Foster in a 1990 FTC report titled “The Costs and Benefits of Occupational Regulation,” synthesize the work of major researchers on the correlation between licensing restrictions and the quality of medical service supplied. Cox and Foster conclude that effects are largely neutral or negative, with few exceptions. They report that optometry most likely experienced neutral or negative effect on quality ; the quality of service by laboratory personnel neutral effect, pharmacistry mostly neutral effect (with the possible exception of citizenship and reciprocity requirements), physician’s services neutral effect, and dentistry positive effect.

Cox and Foster judge the effect of licensing regulations on quality of product supplied. To judge the quality of medical services received, I turn to Carroll and Gaston’s 1981 paper on the subject. In this paper, the authors attempt to determine the effect of licensing regulations on the quality of service received in nine different occupations by observing the frequency with which consumers turn to low-quality do-it-yourself substitutes for professional services in areas with different levels of restrictiveness in licensing regulations. Carroll and Gaston determine that there exists an unambiguous negative association between the strictness of licensing restrictions and the quality of service received. Among the occupations they sampled in order to come to this conclusion were optometry and dentistry, both of which showed this result.

The reason that licensure drives consumers to make use of do-it-yourself substitutes is that licensing restrictions drastically increase the cost of services by restricting the supply of medical professionals. For example, a typical eye exam is 35% more expensive in cities with strict licensing regulations. In states with stricter licensing laws for the dentistry profession, 92% of ordinary dental procedures are more expensive, and dental fees are on average 14-16% higher. In 1982, restrictions associated with licensure in dentistry cost consumers $700 million, and in 1983, such restrictions in optometry cost $500 million (Summers 16).

By severely limiting competition through restrictions on the number of medical professionals and by making it illegal for consumers to choose doctors of lower quality for less money, licensing regulations prevent many people from satisfying basic medical needs, thus significantly lowering the average quality of service received. To borrow an analogy from Milton Friedman, establishing mandatory licensing requirements for the purpose of ensuring that everyone receives high quality medical care is like illegalizing the distribution of any car of lesser quality than a Cadillac in order to prevent individuals from driving low-quality automobiles; the result of minimum quality standards like these is to deprive everyone who cannot afford the highest quality good or service from purchasing that good or service at all, or to drive consumers to use crude substitutes. Presumably in large part as a result this “Cadillac standard” in medicine, twenty million Americans have never visited a dentist and one third of Americans haven’t in two years or more (Cox and Foster 35).

If it is true that licensing restrictions, at best, have neutral effect on quality of service received, and at worst negative effect, while at the same time dramatically increasing prices, licensing regulation cannot be said to be enforced for the benefit of consumers. If not for the benefit of consumers, for whose benefit does licensure exist? To answer this question, a brief review of the history of medical licensure in the United States will be necessary.

Between the late colonial period and the early 1800’s, licensing restrictions were gradually established by state governments (Young 12). During the laissez-faire movement of the the1830’s and 1840’s, reformers fought to repeal licensing laws. (Of particular focus were licensing laws restricting the founding and operating of proprietary medical schools.) By the middle of the 1800’s, licensing regulations were largely eliminated, resulting in dramatically low prices for medical services and the proliferation of doctors until the United States had by far the largest number of doctors per capita of any country in the world, offering an impressive diversity of services (Hamowy 73).

In the 19th century, there were three major forms of medical practice. Regular medicine (also called allopathy ) consisted primarily of bloodletting, blistering, and the prescription of what came to be called the “heroic regimen”: large quantities of various poisons such as mercury, antimony, and arsenic compounds. Homeopathy, founded by Samuel Hahnemann, was the primary threat to the allopathic profession. Hahnemann believed that one could effectively treat an illness by administering a drug that simulated the symptoms of a disease. He also criticized mainstream doctors for their conviction that the effectiveness of medicine always increased with increased dosage; he argued instead that small doses were often safer and more effective. Homeopaths also placed much emphasis on proper diet, sufficient rest, and good personal hygiene. Another alternative form of medicine, eclecticism, rejected the heroic regimen, and instead employed herbal remedies and steam baths to cure ailments (Hamowy 74).

In 1847, a group of allopathic doctors whose incomes were depressed by competition with homeopaths and eclectics, established the American Medical Association in Philadelphia. The AMA, as the representative organization of mainstream medicine, aimed to relax the highly competitive atmosphere in the medical industry by restricting entry into the profession, decreasing the number of proprietary medical schools, and eliminating alternative medical sects. Representatives at the meeting complained of “the large number of Medical Colleges throughout the country, and the facility with which the degree is obtained”. For the next two decades, efforts to restrict competition through voluntary means failed utterly. As a result, at an 1867 meeting in Cincinnati, the AMA commenced a campaign to lobby state governments in order to influence them to create state licensing boards managed by AMA members (Hamowy 75-77).

Around the turn of the century, the AMA’s efforts had tremendous success and by 1913, organized medicine had gained control over state licensing boards in all fifty states, through which they established minimum entry requirements for individuals entering the profession, and gained the power to decide which medical schools would be allowed to operate and which would be terminated. Around the time of the climax of the AMA lobbying movement, another threat to organized medicine, lodge practice, came into conflict with state licensing boards. Lodge practice was a method of medical insurance used by working class fraternal societies , whereby a local society would hire a doctor with a small contribution from each member (usually one or two dollars a year). These “lodge doctors”, who worked for low fees in comparison to what most mainstream doctors earned, were called upon to treat insured members of societies whenever members fell ill. Despite the fact that positions as lodge doctors were coveted by many practitioners, orthodox practitioners despised lodge practice both because of the competitive fees lodge doctors worked for and because of the perceived dishonor of a doctor stooping to treat working class patients for low fees (Long 1-2). The newly-found powers of licensure were exercised to eliminate doctors who participated in lodge practice; this was done by, for example, pressuring hospitals to deny service to lodge members and sanctioning lodge doctors through licensing boards (Beito 231). Licensing boards were also used to purge doctors who practiced heterodox medical methods and to restrict the supply of doctors generally (Hamowy 77-82).

What does this history illuminate about the motivations behind medical licensure? The licensing regime established in the fifty states at the turn of the century by organized medicine remains in place to this day. We have already noted the dramatic revolution in medical fees over the last century. Additionally, in accordance with the AMA’s stated intention, even while the U.S. population has nearly tripled in size since 1900, the number of medical schools has decreased (Steinreich 2). Both of these facts, combined with apparent reality that medical licensure has always been lobbied for by professional doctors, and never by consumers, and with the demonstrated fact that medical licensure does not increase the general quality of medical service consumed, seem to indicate the medical licensure serves the interests of doctors at the expense of consumers.

Before establishing this conclusion, however, it will be necessary to counter the most articulate defense of medical licensure, put forth by Hayne E. Leland. Leland’s study is particularly notable because the bulk of available studies (and all of the studies that I have cited) evaluate the effect of medical licensure on product quality by comparing the medical markets in less-regulated states to the markets in more-regulated states; Leland, by contrast, attempts to describe a medical market entirely free of licensing restrictions, and to compare this theoretical market to one regulated through licensure.

Leland describes the medical industry as characterized by informational asymmetry, meaning that the producers of the service, medical care, know more about their product than the consumer, who lacks a medical degree. In the case of the market for health care, Leland says, not only does the consumer not know all he needs to know in order to assess the competence of a medical professional before receiving treatment, but the consumer also lacks the knowledge necessary to evaluate the quality of the service he has received after he has received it. Because the consumer is incapable of distinguishing good medical service from bad medical service, in a free market for medical services, the services of all medical professionals will be priced at the level at which the lowest-quality service is priced, thus driving all of the more competent professionals out of the market. For this reason, Leland says, medical licensure is necessary (Leland 1979; 1980).

There is certainly some truth to Leland’s observation of informational asymmetry in the market for medical services, as medical professionals typically are more knowledgeable about their product than is the buyer, who may in some circumstances be ignorant of relevant information. Nevertheless, his argument fails both because his economic model is unrealistic and because, even if one accepts his premises, the conclusion of his argument does not follow. For one thing, as Leland himself notes in passing, consumers are at least not entirely without information. Much of the time, if an individual visits a doctor after noticing an ailment, presumably, the patient will be able to tell if the medical procedure applied has relieved him of his ailment. Besides this, physician referral and recommendation from friends and relatives serves as a valuable source of information. Additionally, one can obtain information relevant to medical purchases through consumer reports, or by referring to such readable volumes as the Merck Manual, the Physician’s Desk Reference, and The Doctor’s Book of Home Remedies, books which are becoming increasingly popular among consumers.

But, for argument’s sake, let us assume that the knowledge of a professional is essential for evaluating medical services, and that the above-mentioned sources of information are entirely inadequate. In other words, the consumer of medical services is without relevant information, and so professional doctors approved by the AMA have to identify good and bad doctors for him through licensure. If this were true, as Leland’s model implies, the most obvious solution would be for professional doctors to provide consumers with information, by giving good doctors the AMA stamp of approval. Mandatory licensing goes one step further, by compelling consumers to choose doctors approved of by state licensing boards. The former approach, voluntary certification, provides the benefit supposedly provided by mandatory licensing, product information, without the losses to consumers associated with mandatory licensure .

One of these losses, as we have noted, is increased costs. Besides this, obtaining a license under a regime of mandatory licensure is an arduous and expensive process for aspiring doctors, and as such prevents many qualified doctors, especially those who are not wealthy, from practicing medicine (Summers 29). Voluntary certification, by contrast, has been shown to produce higher numbers of licensed professionals (Summers 35). Voluntary certification by the AMA and by other competing certification organizations, would allow for a greater quantity of doctors, while at the same providing consumers with vital information about product quality. Furthermore, in an atmosphere of competitive voluntary certification, market competition would put the reputation of various certification organizations to the test, preventing abuses of power harmful to consumers that are inherent in the operation of a monopolist licensing authority like a state licensing board.

Among these abuses of power by state licensing boards is the over-restriction of the quantity of doctors at the expense of product diversity. As I have shown, in the early days of medical licensure, orthodox practitioners, presumably to inflate their own incomes, used state licensing boards to eliminate heterodox methods of practice that offered potentially beneficial alternatives to standard care. As in those days, modern medical licensing boards are almost entirely dominated by practicing medical professionals, who face no competition in the issuance of licenses (Summers 18). Undoubtedly as a result of this fact, the modern medical profession often overuses certain medical methods, like surgery, when other, cheaper methods are more appropriate. According to a Rand study, almost half of bypass operations are unnecessary, and some researchers argue that spinal fusion therapy is employed much more often than is required. Additionally, gynecologist Michael Broder, M.D., has found that seventy percent of hysterectomies are performed without prior investigation of their necessity or of alternative treatments, and that one in seven hysterectomies performed is evidently unnecessary (Steinreich 3-4). As Bradley Hennenfent demonstrates in Surviving Prostate Cancer Without Surgery, eighty percent of men with prostate cancer undergo unnecessary surgery, which exposes them to a variety of risks and unpleasant side effects (Hennenfent 21-22).

The economic evidence indicates that medical licensure is harmful to consumers, and that eliminating mandatory licensing requirements may be an effective means of increasing public access to medical services. If this is true, then pursuing this deregulatory path will be distinctly superior to currently proposed statist reforms in healthcare. These reforms will at best accomplish the same result (increased access to medical care) as deregulation with more government interference in civil society, and at worst exacerbate and complicate the present healthcare crisis by adding more arbitrary controls into the medical industry. As I have shown, the more prudent approach is to address the most outstanding cause of high prices and low general quality of service received—medical licensure.




Beito, David. From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967.North Carolina: University of North Carolina Press, 2000.

Carroll, S.L. and R.J. Gaston. 1981. “Occupational Restrictions and the Quality of Service Received: Some Evidence,” Southern Economic Journal 47(4): 959-976

Hamowy, Ronald. 1979. “The Early Development of Medical Licensing Laws in the United States, 1875-1900’” The Journal of Libertarian Studies 3(1): 73-119.

Hennenfent, Bradley. Surviving Prostate Cancer Without Surgery. Roseville Books, 2005.

Leland, Hayne E. 1979. “Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards,” Journal of Political Economy 87(6): 1328-1343.

Leland, Hayne E. 1980. “Minimum Quality Standards and Licensing in Markets with Asymmetric Information,” Occupational Licensure and Regulation, pp 264-284.

Long, Roderick T. "How Government Solved the Health Care Crisis," Libertarian Nation Foundation. 1993. 20 May 2009 .

Miller, J. C., III. (1985). "The FTC and Voluntary Standards: Maximizing the Net Benefits of Self-Regulation," Cato Journal 4(3):897-903.

Steinreich, Dale. “One Hundred Years of Medical robbery,” Ludwig Von Mises Institute. 2004. 12 May 2009. http://mises.org/article.aspx?Id=1547

Summers, A.B. 2007. “Occupational Licensing: Ranking the States and Exploring the Alternatives,” Policy Study 361, Reason Public Policy Institute.

Svorney, Shirley. August 2004. “Do Economists Reach a Conclusion? Medical Licensing,”Econ Journal Watch 1(2): 279-304.

United States. Federal Trade Commission. The Costs and Benefits of Occupational Regulation. October 1990.

1 comment:

Daman said...

Great post! It really gave me an understand of, and some insight into the health care industry.

I was unaware of the influence of the AMA and state-run licensing boards.

I also liked the Cadillac analogy.