Healthcare Economics

Circumstances that shaped
early US healthcare
– the dawn of professional authority 1850-1930

Part 2 of the 3rd article in the series
…Continued from MEH July-August 2012

Summary of Part 1 – 1850-1930 was the time period when medicine was accepted as a bona fide field, writes Arby Khan, because physicians could actually help a patient in need. Such competence was the result of fundamental advances in the science of medicine – such as the discovery and application of antisepsis, development of the stethoscope, emergence of anesthesia, and the development of advanced surgical techniques. In addition to scientific advances, however, there was substantial progress in creating a standardized and uniform curriculum for medical school and higher level training (later called “residency”). This standardization led to better trained physicians and surgeons. Lastly, the continued development, maturation, and influence of the American Medical Association led to an increase in the standard of training and care provided by physicians – e.g. the ranking of medical schools and identifying those that provided subpar training. In fact, the Flexnor report (commissioned by the AMA), was instrumental in reducing the number of medical schools from 131 to 95 – thus eliminating substandard ones. In this issue’s article, we will continue to study this era (1850-1930) and describe the development of powerful independent groups and how, in the absence of strong national direction, they essentially moulded the healthcare industry to suit their individual agendas.

Development of Powerful Independent Groups

As medicine evolved into a respectable and effective profession and medical accomplishments accumulated, the prospect of financial profit became a reality. This is a pivotal point in the evolution of US healthcare and from which countries in the Middle East can glean an important lesson. As the healthcare profession developed there was no clear national strategy or long term direction as to how healthcare should be provided to all citizens. This void was filled by various independent groups whose sole purpose was to make a profit and thus attempted, and most of the time succeeded, in shaping US healthcare to maximize their respective share of the profits. Some of these groups included hospitals, physicians, insurance companies, and unions. The result, as we see now and as described in the first article of this series[1], is a fragmented and inefficient system that excludes almost 50 million people. Thus, countries in the Middle East who are currently developing healthcare systems should consider developing a clear national and long term strategy that allows for efficient and inclusive healthcare for their citizens. These countries should also make sure that no stakeholders have undue influence that warps the whole healthcare system in their favor. Let’s briefly look at two of the several groups that influenced the development of healthcare in their favor and to the detriment of the citizen and the country as a whole.

Hospitals: Prior to 1900 hospitals were considered to be “death houses” - mostly because of the physician’s inability to heal and because of rampant infections that almost uniformly lead to death of the patient. Thus physicians would only send their patients to hospitals if absolutely necessary. With the medical advances mentioned above, hospitals changed significantly in number and function as they became not only effective healing institutions but also profit generators. In 1872 there were 178 hospitals in the US and in 1910 there were more than 4,000[3]. The hospital system in America emerged in a series of three phases. First, from circa 1751 – 1851, was the formation of voluntary hospitals – operated by charitable lay boards - and public hospitals – descended from almshouses and operated by local city governments. Second, from about 1850 – 1900, a variety of more “particularistic” hospitals was formed – primarily religious, ethnic, and specialized hospitals for certain diseases or categories of patients such as children and women. The third phase, from about 1900 to 1920, saw the emergence of “for-profit” hospitals, which were operated by physicians and by corporations. This last phase reflected the potential for profit as surgery had made tremendous progress and people would actually come to a hospital and pay to get cured[9]. As the number of hospitals increased, from 178 to 4000, in a short period of time, the logical need for a representative organization arose – and appeared in the form of the American Hospital Association (AHA) in 1908. As expected, the AHA pursued a course of action that was favorable to hospitals and their profits. For example, they pursued and supported legislation that would provide government subsidies for private insurance rather than support reform for national health care. They tried, and succeeded, in supporting forms of insurance that would increase their power and monopolies – thus limiting the citizen’s ability to acquire lower costing hospitalbased insurance[10]. So, for example, a quote from Rorem (AHA’s Chief Expert on group hospitalization) stated that in 1944 the early singlehospital plans had resulted in “competition among the hospitals, and interference with the subscribers’ freedom of choice and the physician’s prerogatives in the care of private patients.” It is unclear, however, says Paul Starr, “…why subscribers would have had less choice (emphasis added) if they could choose from a variety of plans offered by the hospitals in their community.” It was clear that the AHA wanted a monopoly by supporting larger insurance plans that would encompass greater communities and thus secure a higher price (due to the monopoly) which in turn would mean higher reimbursements for the hospital treating that patient. In another example, the AHA organized a national commission to develop support for getting the federal government to pay for a large scale hospital expansion. The AHA gathered the usual array of college presidents, corporate executives, and professional dignitaries to serve as the commission’s membership. Not surprisingly, the commission recommended a huge program of hospital construction – an additional 195,000 beds (a 40% increase nationwide). The final report was quite vague as to the benefits of this tremendous increase. As Paul Starr puts it, “…the benefits, said the commission, would fully justify the expenditure. These benefits the commission evidently considered too obvious to establish. Still less did it weigh them against the potential benefits of alternative investments in health care….” Legislation (Hill-Burton Program) followed that created significant funding for the hospitals, and in addition, Starr observes, “…it provided money that enabled many smaller and uneconomical hospitals to keep operating.” There were, however, some tangential benefits that materialized from the AHA’s interventions (e.g. the fact that the supply of hospital beds in low-income states rose to the levels in high income states[11]) – but such benefits were mostly corollaries to the main aim of expansion and profits at the expense of the government.

Physicians: As medical knowledge increased and technology improved in quantum leaps from 1850-1930, so did the prestige and profits of the individual physician and surgeon. Not surprisingly, then, the American Medical Association became more and more influential – but not always to the benefit of the health of all citizens. Even though the AMA supported, and was instrumental in creating, professional standards during 1850-1930, which was of great benefit to the field of medicine, they nevertheless took stands that only served their parochial interests and to the eventual detriment of a national healthcare system. Very early on, the AMA demonstrated hostility towards groups that did not conform to their ways – e.g. their violent opposition to homeopathy starting in the 1850s[12]. Another telling example is physicians’ opposition to public health endeavors – such as New York state’s very successful prevention of fatalities from diphtheria[13]. Even though New York State’s success became internationally renowned, not to mention it saved thousands of lives, the physicians denounced the state’s efforts as “municipal socialism” and as unfair competition with them. Similar opposition was unleashed onto the state’s efforts to improve school health services. The state tried to integrate diagnostic school health programs with actual treatment of common ailments (e.g. treatment for trachoma eye infections which afflicted 18% of the children[13]), but with no success. The physicians wanted the exclusive right to treat so that they wouldn’t lose revenue. Once again, Starr laments that “…there would be no integration of school health programs with health services, just as there was no integration of other public health activities. Private interests created a barrier to any unified organization”[ 13]. Yet another effort by the health department to create health centers, where all the fragmented efforts of the state could be efficiently put under one roof (e.g. maternal care, infant care, clinics for venereal disease and tuberculosis, services for school children), was vehemently opposed by physicians. The parochial interests of the physicians were evident in their written objections where they stated that “Too much power is given to the laity and too little to the medical profession…Too much power is given to the County Boards of Supervisors and Mayors of cities…Too much power is given to the State Department of Health…Too little recognition and power is [sic] given to the medical profession.” As a result of this opposition, the concept of health centers was comprehensively eliminated in a bill that the state legislature subsequently passed in 1923. This artificial separation of diagnosis from treatment, and more generally of preventive from curative medicine, is an excellent example of how parochial interests led to a fragmented system that was inefficient and ineffective for the population at large (but lucrative for the physicians). Perhaps most importantly, the AMA strongly opposed any universal health insurance in the early 1900s[14] and certainly from 1935 – 1965[15]. Details of this opposition, and that by other stakeholders, are beyond the scope of this article and the reader is referred to other sources[3, 15]. An interesting comparison of the evolution of the British and American medical systems, and how private interests led to the current differences, can also be found in a recent analysis[16].

Whereas we have discussed only two of the stakeholders (hospitals and physicians), there were many others (pharmaceutical industry, labor unions, insurance companies, to name a few) who wielded much influence in shaping the healthcare infrastructure of the US. However, the lessons learnt for countries that are currently developing their healthcare infrastructure are clear. First, there should be a clear, national strategy whose primary goal should be a universal system of coverage. It has been demonstrated repeatedly that effective cost and risk distribution amongst the sick and the healthy can only occur when the entire population is covered. Continuing to privatize the care of low risk individuals (private insurance) and socialize the care of high risk individuals (Medicare, Medicaid, etc.), as is done in the US, clearly does not work. Second, it is critical that no single stakeholder is allowed to skew the system, or the relevant legislation, in a way that benefits only that stakeholder and clashes with the prime directive of universal health coverage. Third, countries in the Middle East should not accept medical systems from the outside in their entirety. These foreign medical systems were developed in different parts of the world with different pressures and requirements. Thus, the final shape of the healthcare system developed in the US, or Sweden, or England may not, in fact most likely is not, the optimal for any given country in the Middle East. The foreign medical systems need to be studied, the good points assimilated, the inapplicable eliminated, and the system modified to fit the specific healthcare needs of any given country in the Middle East.


The period of 1850 – 1930 was a critical period of development for the medical field. Older but disparate developments by Hippocrates (medical ethics), Galen (anatomy and the science of direct observation), Harvey (circulation of the blood), Vesalius (definitive human anatomy), Pare (early advances in surgical techniques), Morgagni (the anatomical concept of disease), and Jenner (discovery of vaccination) served as a foundation upon which were added subsequent discoveries such as the stethoscope, the germ theory, and the discovery of anesthesia. Put together, this totality of knowledge created, during 1850-1930, a critical mass of information that signified the dawn of a medical profession that could actually heal suffering patients. Especially visible to all was the success of surgery – as integration of anesthesia, advanced surgical techniques, and infection prevention created eminently successful outcomes. As the number of such successful outcomes increased, so did the willingness of patients to pay for procedures. This initiated the era of profit in medicine and hospitals started to multiply rapidly. As the medical industry developed, various stakeholders appeared on the scene and, over time organized themselves into powerful lobbies that tried, and mostly succeeded, in molding the healthcare infrastructure and legislation in their favor. The medical profession and allied stakeholders lobbied for autonomy, and aggressively supported legislation that made a strong case for public aid to medicine but without public control. The consequence was a fragmented, inefficient, and expensive system that ignored the healthcare needs of 50 million Americans. The major lesson to be learnt by Middle Eastern countries, which are currently developing their medical infrastructure, is that comprehensive medical care for all citizens - the very young, the very old, and everybody in between - is the only way to effectively distribute the risk and cost of medical care - and parochial interests should have limited influence in shaping the healthcare system.

- The next article will examine the time period 1930-2011, which represents a period of significant turmoil and struggle in the healthcare system in the US. This era starts with the birth of Blue Cross (ca. 1929) and ends with the passage of the Affordable Care Act (aka Obamacare).


Arby Khan, MD, FACS, MBA is the Deputy National Director for Surgery for the United States Veterans Health Administration - which oversees 151 hospitals and more than 1000 outpatient clinics. Dr Khan is a regular contributor to Middle East Health. He has written on a range of subjects – such as Human Resources management in hospitals, Change Management in GCC hospitals, Brain Death and Hospital Resource Management and organ transplant- related legislation, among others – with a view to improving healthcare in the UAE and the wider region. He is a multi-organ Transplant Surgeon and Immunologist and has successfully started, from the ground up, two multiorgan transplantation programmes – one in the United States and one in Abu Dhabi. He is the author of many clinical and basic immunology papers, and has been educated, trained and employed variously at University of California - Berkeley, McGill University, University of California - San Francisco, Harvard Medical School, Yale University - Graduate School of Immunobiology, University of Pittsburgh - Starzl Transplantation Institute, University of Vermont - School of Medicine, and Columbia University (NY). He also holds an MBA, with Distinction, from London Business School.

– The views expressed in this article are those of the author and do not necessarily represent the views of the institutions for which Dr Khan has worked or currently works.



1. Khan, A., The Importance of determining ‘Value’ in Healthcare. Middle East Health, 2012(Jan-Feb).

2. Khan, A., Circumstances that Shaped Early US Healthcare - 1760-1850. Middle East Health, 2012(March-April): p. 54-59.

3. Starr, P., The Social Transformation of American Medicine 1982: Basic Books.

4. Imber, G., Becoming a Surgeon, in Genius on the Edge - The Bizarre Double Life of Dr. William Stewart Halsted, G. Imber, Editor 2011, Kaplan Publishing: New York.

5. Nuland, S.B., Doctors - The Illustrated History of Medical Pioneers 1988, New York: Black Dog and Leventhal Publishers, Inc.

6. Nuland, S.B., The Germ Theory Before Germs - The Enigma of Ignac Semmelweis, in Doctors - The Illustrated History of Medical Pioneers, S.B. Nuland, Editor 1988, Black Dog and Levanthal Publishers, Inc: New York.

7. Nuland, S.B., Surgery Without Pain - The Origins of General Anesthesia, in Doctors - The Illustrated History of Medical Pioneers, S.B. Nuland, Editor 1988, Black Dog and Levanthal Publishers, Inc: New York.

8. Morris, R.A., A Vision of the Future Starts to Take Shape. Middle East Health, 2012. May-June: p. 32.

9. Starr, P., The Reconstitution of the Hospital, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

10. Starr, P., The Triumph of Accomodation, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

11. Starr, P., The Liberal Years, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

12. Starr, P., The Consolidation of Authority 1850-1930, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

13. Starr, P., The Boundaries of Public Health, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

14. Starr, P., The Mirage of Reform, in The Social Transformation of American Medicine, P. Starr, Editor 1982, Basic Books.

15. Starr, P., Remedy and Reaction - The Peculiar American Struggle over Healthcare Reform 2011, New Haven, CT: Yale University Press.

16. Gorsky, M., Hospitals, Finance, and Health System Reform in Briain and the United States, c. 1910-1950: Historical Revisionism and Cross-National Comparison. Journal of Health Politics, Policy, and Law, 2012. 37(3).

 Date of upload: 26th Sep 2012


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