As the twentieth century progressed, several changes occurred that tended to increase the role that medicine played in people's lives and to shift the focus of treatment of acute illness from homes to hospitals. These changes caused the price of medical care to rise as demand for medical care increased and the cost of supplying medical care rose with increased standards of quality for physicians and hospitals.Increases in the Demand for Medical Care
As the population shifted from rural areas to urban centers, families lived in smaller homes with less room to care for sick family members (Faulkner 1960, p. 509). Given that health insurance is a normal good, rising incomes also helped to increase demand. Advances in medical technology along with the growing acceptance of medicine as a science led to the development of hospitals as treatment centers and helped to encourage sick people to visit physicians and hospitals. Rosenberg (1987) notes that "by the 1920s… prospective patients were influenced not only by the hope of healing, but by the image of a new kind of medicine -- precise, scientific and effective" (p. 150). This scientific aura began to develop in part as licensure and standards of care among practitioners increased, which led to an increase in the cost of providing medical care.
Rising Medical Costs
Physician quality began to improve after several changes brought about by the American Medical Association (AMA) in the 1910s. In 1904, the AMA formed the Council on Medical Education (CME) to standardize the requirements for medical licensure. The CME invited Abraham Flexner of the Carnegie Foundation for the Advancement of Teaching to evaluate the status of medical education. Flexner's highly critical report on medical education was published in 1910. According to Flexner, the current methods of medical education had "... resulted in enormous over-production at a low level, and that, whatever the justification in the past, the present situation... can be more effectively met by a reduced output of well trained men than by further inflation with an inferior product" (Flexner, p. 16). Flexner argued for stricter entrance requirements, better facilities, higher fees, and tougher standards. Following the publication of the Flexner Report, the number of medical schools in the United States dropped from 131 in 1910 to 95 in 1915. By 1922, the number of medical schools in the U.S. had fallen even further to 81 (Journal of the American Medical Association, August 12, 1922, p. 633). These increased requirements for physician licensure, education and the accreditation of medical schools restricted physician supply, putting upward pressure on the costs of physicians' services.2
After Flexner's report, a further movement towards standardization and accreditation came in 1913, when the American College of Surgeons (ACS) was founded. Would-be members of the ACS had to meet strict standards. For a hospital to gain the accreditation of the ACS, it had to meet a set of standards relating to the staff, records, and diagnostic and therapeutic facilities available. Of 692 large hospitals examined in 1918, only 13 percent were approved. By 1932, 93 percent of the 1,600 hospitals examined met ACS requirements (Shyrock 1979, p. 348).
Increasing requirements for licensure and accreditation, in addition to a rising demand for medical care, eventually led to rising costs. In 1927, the Committee on the Costs of Medical Care (CCMC) was formed to investigate the medical expenses of American families. Comprised of physicians, economists, and public health specialists, the CCMC published 27 research reports, offering reliable estimates of national health care expenditures. According to one CCMC study, the average American family had medical expenses totaling $108 in 1929, with hospital expenditures comprising 14 percent of the total bill (Falk, Rorem, and Ring 1933, p. 89). In 1929, medical charges for urban families with incomes between $2,000 and $3,000 per year averaged $67 if there were no hospitalizations, but averaged $261 if there were any illnesses that required hospitalization (see Falk, Rorem, and Ring). By 1934, Michael M. Davis, a leading advocate of reform, noted that hospital costs had risen to nearly 40 percent of a family's medical bill (Davis 1934, p. 211). By the end of the 1920s, families began to demand greater amounts of medical care, and the costs of medical care began to increase.