Medical Practice Today: How Did We Get Here? (Part II)

John R. Hilsabeck, MD, FACS
Article Type: 
Feature Article
Fall 1996
Volume Number: 
Issue Number: 

In Part I of this essay published in the Medical Sentinel, Summer 1996 issue, I discussed three of the seven enemies of the practice of medicine: Non-profit Hospitals/Hospital Administrators, Compulsory National Health Care Consortium, and Government Legislation and Implementation.

In Part II, I will conclude my discussion with the remaining four and — particularly, in the case of Insurance Companies and the Medical-Industrial Complex — trace the events which led to their present position of power.

Malpractice Squeeze

“Malpractice Squeeze” is familiar to all of us. It is now even more important for doctors because all of the changes facing us in providing health care have drastically reduced our net income from medical practice. We practice defensive medicine, which adds one more factor in a further escalation of health care costs. These costs will never be reduced without tort reform, and doctors will soon be unable to afford malpractice insurance.

Pharmaceutical Costs and FDA Impact

Why does the same medicine, produced by the same company, cost two to three times as much in this country as it does across the border? And, in this country, why should a two month supply of Levamisole cost a cancer patient $200, while twice as much Levamisole costs a farmer only $6.39 for a two month supply for his pigs? Why should a year’s supply cost a cancer patient in Europe only $150? The answer to this question posed to Levamisole’s manufacturer was that the price was determined by “what the market would bear.”(1)

The cost of bringing new drugs and medical innovations to the market by the FDA has become outrageous. The ultimate payer of this cost is the American consumer. How much has the FDA actually contributed to the safety of the American people by their overzealousness to protect us? Could we have the same level of safety if the FDA merely certified that products, including medical devices and medications, in themselves were not poisonous for human consumption when used as directed? (You are not supposed to drink iodine; you put it on a cut!) These points were brought up by Michael Tanner of the Cato Institute in a Citizens Against Government Waste symposium in 1994.(2)

The big drug companies “write off” or pass on to consumers the $231 million or more required today to bring a drug to market, and it keeps out competition from entrepreneurs and small drug companies. The American people are the losers when valuable new products developed by small companies are kept off the market.

Insurance Companies

Insurance plans today are entirely different from those that existed before Medicare. Most non-profit plans are now for-profit corporations. Even the majority of Blue Cross of California subscribers have been transferred over to its for-profit WellPoint unit.(3) Only a small number are left with the non-profit unit.(4)

If you don’t believe doctors have enemies, read John Hayes’ interview(3) with Leonard Schaeffer, the 48-year-old CEO of Blue Cross of California since 1986, and Tom Paulson’s exposé of “The Blues.”(5,6,7,8) At age 33, Schaeffer reorganized HCFA (Medicare/Medicaid) under President Carter, having already served as state budget director for Illinois, Citibank vice-president, and HEW assistant secretary.

At Blue Cross of California, Schaeffer terminated 2500 employees, brought in his own management team, switched from selling indemnity health insurance to selling managed care services (now 95% of revenues, covering 2.2 million people), spun off WellPoint Health Networks, a for-profit subsidiary, and in 1993, sold 20% of WellPoint to the public for $517 million. WellPoint pays about 55% of hospitals’ standard billing rate, cut specialists’ fees by an average of 6% in May 1993, is buying Unicare, a workman’s compensation company, and is looking for more acquisitions. Schaeffer presently sits on $1.6 billion in cash; he deals with 34,000 physicians and 310 hospitals.

Following divestiture by Blue Cross of California, WellPoint Health Networks, Inc. ended up with 2,162,000 enrollees, according to records filed with the Securities Exchange Commission by WellPoint, while Blue Cross of California was left with 378,743 enrollees.(4) The California Medical Association 1992 report reveals for the first time how the Knox Keene Plans spend the health care dollars entrusted to them by the public, information not readily available for public review, and particularly important in properly evaluating health plan expenditures, for example, “ light of recent court cases involving denial of care.” These plans basically are a type of managed care but can include Blue Shield and other plans.(9)

The report presents examples of executive compensation packages for fiscal 1992 which speak for themselves: Daniel D. Crowley, President/CEO of Health Corporation, $4, 374, 973; Wilson H. Taylor, Chairman of the Board/CEO of Cigna Corporation, $2,391,406; Roger F. Greaves, Chairman of the Board/President/CEO of HealthNet Management Holdings Inc., $1,950,437; Leonard D. Schaeffer, CEO of WellPoint Health Networks, Inc., $1,378,799; Terry Harshorn, President/CEO of Pacific Care of California, $1,223,747. The compensation of the other four executives listed ranged downward from $1,076.029 to $365,000. Cash compensation does not include income from stock options.*

Tom Paulson’s investigation of “The Blues” in Washington and Alaska began when he unearthed a closely guarded secret that Donald Lockwood, president of Blue Cross of Washington and Alaska, had received almost $1 million in salary, bonuses, and deferred compensation in 1991.(5) He was aware of nationwide concerns of the finances and lack of accountability of Blue Cross organizations.

Senator Sam Nunn’s Senate subcommittee investigation of the corporate behavior and financial responsibility among members of the national Blue Cross and Blue Shield associations, the results of subsequent audits in a number of states by State Regulators, the resignation of the CEOs in New York ($600,000) and Louisiana ($700,000) as a result of state and federal investigations of Blue Cross administrative finances, and the dismissal of the head of the Colorado Blue Cross and Blue Shield system when it was learned he was paid over $575,000 in 1992, were already a matter of record. Colorado Blue Cross/Blue Shield also had unjustifiably high rates. On presenting his information to Washington Insurance Commissioner Senn, the latter said, “We are seeing outrageous salaries for Blues executives across the country at a time when people can’t afford insurance. This needs to be examined closely and immediately.”

Paulson was unable to gather exact information from Blue Cross on Lockwood’s compensation package for 1991 or 1992, or for vice-president Betty Woods’ compensation for 1991. His newspaper had obtained a Blue Cross board report which showed Lockwood’s 1991 compensation as $824,717 in salary and bonuses, with a deferred salary of $162,842 to be collected on retirement.

The report also showed Woods received at least $512,306 in salary and bonuses in 1991, plus $101,155 in deferred payments. The Blue Cross chairman, a retired U.S. West executive, refused to disclose what the insurance company paid its executives or its board members. Those board members not on the executive committee reportedly were aware of only a portion of the executive pay at Blue Cross, not the full amount of compensation. The figures cited above might not include compensation for its several for-profit subsidiaries. Disclosure of the Blues’ administrative expenses including executive pay is not required in Washington state. The state’s two largest Blues appear to have increased rates about 50% over the past two years for individual plans, and 30% in the past year for group plans.

Blue Cross of Washington and Alaska finally released figures to show Lockwood received $712,788 in 1991 (“not the nearly $1 million”) and that Woods received a total of $449,460 in 1991. Woods succeeded Lockwood as CEO in March 1993.(6)

Subsequently, an audit by Insurance Commissioner Senn’s office of King County Medical Blue Shield7 found top executives were paid bonuses whether the company gained or lost money, and documentation of executive expenses was poor. Winlock Pickering, president and CEO, received a total compensation of $420,771 in 1992. The company sustained $12 million underwriting loss in 1991, but top executives received bonuses ranging from 5% to 16% of their salaries. Poorly documented travel and entertainment expenses

included $13,184 in sporting events tickets, private club memberships, spousal travel costs, and a $31,706 Cadillac purchased for Pickering. Pickering’s base salary increased from $250,175 in 1989 to $407,193 in 1992. The average employee’s salary increased to $23,231 from $16,204 during the same period. Paulson notes that the CEO compensations may be even higher, since reportedly executives receive compensation or benefits through the company’s for-profit subsidiaries and contributions to life insurance policies that can be cashed out upon their retirement.

Paulson’s final article reported that a state audit by Insurance Commissioner Senn’s office found executive pay at Blue Cross of Washington and Alaska was among the highest for this size nationwide.8 The ongoing audit reported former CEO Lockwood received $579,255 in salary in 1992. Lockwood received a pay package of more than $700,000 in 1991, which included a deferred bonus and a few smaller items of compensation in addition to his salary. Blue Cross executives dismissed Senn’s criticism of their executive compensation as a “difference of opinion.” The audit showed CEO Woods received a salary of $495,101 in 1993 and additional deferred compensation funds of $172,011 to be paid in 1995. Lockwood received $42,500 in salary, $187,500 in “other compensation” for 1993, and deferred compensation funds of $162,842 to be paid to him in 1995. Senn’s office has no authority to regulate executive compensation, but made the point that for-profit State Farm Insurance pays its CEO $250,000, and the non-profit Health Cooperative pays its CEO about $300,000. The Blue Cross board chairman wrote that it must pay its executives attractive salaries to compete with for-profit insurers. Lockwood, age 60, joined Blue Cross in 1984, retired after ten years in 1993, remains as a paid consultant, and receives an annual retirement payment of $102,000.

The tilt toward HMOs began when the Nixon administration, followed by the Reagan administration, adopted the HMO concept. Since then, the headlong rush of employers to save money by signing their employees up with HMOs, managed care groups, and other prepaid plans has meant that the physician’s ability to practice medicine and make a living is now jeopardized. The fee structure for citizens over 65 who are enrolled with Medicare as their primary insurance carrier is so low that a doctor with a large load of such patients will have difficulty making a living.

Doctors can be turned down by these health plans and dismissed for any number of reasons, such as alleged overutilization of resources or services for their patients. The playing field is not level for doctors.(10,11)

The playing field has not been level for all Americans, either. Defense employers were unable to raise wages during World War II because of price controls; so they compensated employees by paying for health insurance. The IRS in 1954 confirmed that the employers’ contributions to employees’ health benefit plans were non-taxable for the employee and deductible for the employer. People not covered by employer provided health plans are forced to buy their own insurance, and premiums or monies paid for health services rendered are not tax deductible. Correction of this problem would help the fee-for-service doctor a little, but most of all, correction would rectify an injustice suffered by these disadvantaged citizens who have had to pay twice for their health insurance all these years.(12)

Medical-Industrial Complex

My last discussion deals with the emergence of the Medical-Industrial Complex (MIC). Other than the government, I believe this to be the major threat to the practice of medicine as we have known it, and to the patient-doctor relationship. In 1980, Arnold Relman (13,14) and subsequently others(15,16,17,18,19) drew attention to this industry that was quietly developing to provide health care for profit. Relman wanted “to insure that the medical-industrial complex puts the interests of the public before those of its stockholders.”

Paul Starr, in his book, agreed and expanded on the need for monitoring the close business relationships developing between the for-profit hospitals, nursing homes, and their suppliers.(20) In 1984, Stanley Wohl, while a Stanford University Medical Center active staff member and president of InfoMed Systems, Inc. of San Francisco, and an experienced financial analyst, wrote the definitive financial and statistical analysis of the MIC.(21)

This all began in the late 1950s,(21) when Nashville cardiologist Thomas Frist Sr. and several associate doctors founded Parkview Hospital. When money was needed to expand, Frist formed a corporation with his associates and raised capital by selling stock to the public. The 1965, Medicare/Medicaid payment schedules were overly generous. Corporate accountants and some individual doctors realized the astronomical profits that could be made from day one by running high volume, cost efficient operations.

Frist realized the advantage of stringing together several hospitals, combining administrative and other functions to cut overhead costs and in 1968, together with his son, Thomas Frist, Jr., and an ex-patient of his, Jack Massey, one of the founders of Kentucky Fried Chicken, incorporated Hospital Corporation of America. In October 1994, Columbia-HCA Health Care Corporation acquired HealthTrust, its biggest rival, and the combined company will now own and operate 311 hospitals.(22)

Frist’s famous formula was:

1. Study Medicare legislation

2. Form a corporation

3. Go public to raise capital

4. Acquire more and more health care facilities

5. Make a healthy profit for all concerned

HCA, Humana Hospital, National Medical Enterprises, American Medical International, and Beverly Enterprises all applied Frist’s formula.

Three authors have warned physicians about the takeover of medical care by the medical-industrial complex. First, Arnold Relman(13) perceived the threat of future control of medicine by the Medical-Industrial Complex if we did not watch out. Then Paul Starr(20) warned us that the emergence of the MIC could mean their domination in health care, commenting in depth about the components of the complex and how they were beginning to be interwoven. Finally, Stanley Wohl(l21) documented that these warnings were not unwarranted by collecting the financial data needed to show the web created by these intermeshed corporations, how the web formed, what was happening as a consequence, and the threat to the patient-doctor relationship if the MIC gained control of health care in the United States. He found that close to 500 corporations listed on Wall Street were involved in fierce competition for health care investment dollars by 1983.

In twenty short years, health care had become the largest industry in the United States, largely because a handful of visionary entrepreneurs took advantage of the astronomical profits they foresaw in Part A of the 1965 Medicare/Medicaid legislation.

Wohl was shocked that while Wall Street investors paid attention to these transactions for their financial input, the entire medical profession and the general public, those who had the most to lose or gain from this hierarchical reshuffling, barely noticed these transactions, transactions that could change forever the way medicine has been dispensed and the patient-doctor relationship. The same could be said about the regulators. Corporations simply marched in because there was a profit to be made. Attracted by their profits, corporate America and Wall Street quickly stepped in to become part of the Medical-Industrial Complex and have been handsomely rewarded.

This all has to do with the changing share of the health care dollar. Whereas previously a large share was spent for doctors’ services, in recent years more and more of that dollar is being eaten away by hospitals, administrators, pharmaceuticals, expensive medical tests and equipment, and other ancillary costs of hospitalization such as computer hardware and software.

Implementation of the Tax Equity and Fiscal Responsibility Act and Social Security Amendments enacted October 1, l983, has added another layer of hospital and non-hospital based administrative staff and consultants, none of whom provide direct patient care.Wohl estimated that “in 1984 if every physician provided all professional services free of charge it would only cut total health care spending by less than 4 percent. Less money was spent in 1981 for physician services than for hospital toilet paper, tissues, and other assorted paper products.” Of $317 billion spent in 1982 on health care, $118 billion was received by MIC companies.(21)

In reviewing Starr’s book, Relman pointed out that while doctors might not agree with all that Starr presents, “...they can ignore its message at their peril.”(23) We have largely ignored this message and the warnings. If we continue to do so, what once was the finest medical system the world has ever known will rapidly become third-rate.

In a telephone conversation with me, Wohl expressed his belief that now is the time of the MBAs and the administrators and Wall Street. In his view, the pendulum will probably swing back in about ten years when the American public sickens of the way they are cared for by the Medical-Industrial Complex, and demands a return to the patient-doctor relationship.(24)

In the meantime, we must refuse to accept the direction that medical care is headed in its degradation of doctors. Whether we become involved politically, speak out through our professional organizations, or speak out individually, we must do it.(25) No one is going to do it for us!


*For updated salary figures (1994) for managed care CEOs, see “It’s Great to be the King” news capsule in Medical Sentinel, Summer 1996 issue, page 4.


1. Siegel B. Faith lost, a doctor turns bitter. Los Angeles Times 1993;September 12: A1.

2. Tanner M. Deregulation. The First Step to Health Care Reform. Policy Forum. Health Care. Citizens Against Government Waste. Washington, DC, January 1994: 11.

3. Hayes JR. Faces behind the figures. Blue no more. Forbes 1994;January 3:92.

4. California Medical Association. Fiscal Summary: Knox-Keene Plan Expenditures. Fiscal Year 1992. Tables: 6.

5. Paulson T. Paying the Blues. Salaries kept a closely guarded secret by insurers. Seattle-Post-Intelligencer 1993; August 27: A1.

6. Paulson T, Clever D. Blue explains pay. Seattle-Post-Intelligencer 1993; September 4:A1.

7. Paulson T. A critical audit for health plan. State takes Blue Shield to task over executive pay and bookkeeping. Seattle-Post-Intelligencer 1994;May 7:B1.

8. Paulson T. State critical of Blue Cross executive pay. Compensation ranks high for plan of its size, Senn says. Seattle-Post-Intelligencer 1994; May 10:B1.

9. The California Medical Association’s Summary of California HMO Laws Affecting Physicians 1994. California Medical Association 1994: 26 pp.

10. Marcus SA. Trade unionism for doctors: An idea whose time has come. N Eng J Med 1984; 311: 1508-11.

11. Burnett R. Coping with MDs’ “most formidable enemy.” California Physician 1994;May:30.

12. Goodman JC, Musgrave GL. Patient Power; Solving American’s Health Care Crisis. Cato Institute, Washington, DC, 1992.

13. Relman AS. The new medical-industrial complex. N Eng J Med 1980; 303: 963-70.

14. Relman AS. Investor-owned hospitals and health-care costs. N Eng J Med 1983; 309: 6.

15. Pattison RV, Katz HM. Investor-owned and not-for-profit hospitals, a comparison based on California data. N Eng J Med 1983; 309: 347-53.

16. Davidson CS. Are we physicians helpless? N Eng J Med 1984; 310: 1116-8.

17. Ginzberg E. The monetarization of medical care. N Eng J Med 1984; 310: 1162-5.

18. Iglehart J K. Health policy report: Medicare turns to HMOs. N Eng J Med 1985; 312: 132-6

19. Ginzberg E, Ostow M. The Road to Reform: The Future of Health Care in America. The Free Press, A Division of Macmillan, Inc., New York, NY, 1994, 210 pp.

20. Starr P. The Social Transformation of American Medicine. Basic Books, New York, NY, 1982, 514 pp.

21. Wohl S. The Medical Industrial Complex. Harmony Books, a division of Crown Publishers, Inc., New York, NY 1984, 218 pp.

22. Associated Press. Columbia-HCA to merge with Health Trust in 5.4 billion deal. Health care: Columbia is already the nation’s largest hospital operator. The new firm would have 311 facilities. Los Angeles Times 1994;October 5:D1.

23. Relman AS. The Social Transformation of American Medicine, Book Review. N Eng J Med 1983; 308:466.

24. Wohl S. Personal Communication. October 22, 1994

25. Remine WH. The Decade Ahead. Presidential address. Arch Surg 1981; 116: 505-7.

Dr. Hilsabeck is an Associate Clinical Professor of Surgery at University of California at Irvine. His address is 11611 S.W. Skyline Drive, Santa Ana, CA 92705. Revised text of Presidential address to Priestley (Mayo Surgical Alumni) Society, Asheville, NC, October 28, 1994.

Originally published in the Medical Sentinel 1996;1(3):14-17. Copyright ©1996 Association of American Physicians and Surgeons (AAPS).



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