Medical-Industrial Complex

The concept of the medical-industrial complex was first introduced in the 1971 book, The American Health Empire (Ehrenreich and Ehrenreich 1971) by Health-PAC. The medical-industrial complex (MIC) refers to the health industry, which is composed of the multibillion-dollar congeries of enterprises including doctors, hospitals, nursing homes, insurance companies, drug manufacturers, hospital supply and equipment companies, real estate and construction businesses, health systems consulting and accounting firms, and banks. As employed by the Ehrenreichs, the concept conveys the idea that an important (if not the primary) function of the health care system in the United States is business (that is, to make profits) with two other secondary functions, research and education.

Since that time, a number of authors have examined the medical-industrial complex: Navarro (1976, pp. 76, 80), Relman (1980), Estes and colleagues (1984), Wohl (1984), and McKinlay and Stoeckle (1994). Himmelstein and Woolhandler (1990) argue that health care facilitates profit making by

(1) improving the productivity (health) of workers,

(2) ideologically ensuring the social stability needed to support production and profit, and

(3) providing major opportunities for investment and profit (p. 16).

The last function, profit, is now ‘‘the driving force,’’ as health care has fully ‘‘come into the age of capitalist production’’ (p. 17).

Arnold Relman (1980), Harvard medical professor and editor of the New England Journal of Medicine, was the first mainstream physician to write about the medical-industrial complex, observing that the corporatization of medicine is a challenge to physician authority, autonomy, and even legitimacy for the doctors who become health care industry owners. Ginzberg (1988) and others (Andrews 1995; Estes et al. 1984; Himmelstein and Woolhandler 1990) have written about the monetarization, corporatization, and proprietarization of ‘‘health’’ care. By the mid-1980s, the author of a book appearing with the title The Medical Industria1 Complex (Wohl 1984) did not see the need to define it but, rather, began with ‘‘the story of the explosive growth of . . . corporate medicine’’ and focused on ‘‘medical moguls,’’ monopoly, and a prescription for profit.

While the health care industry has certainly contributed to improvements in the health status of the population, it has also strengthened and preserved the private sector and protected a plurality of vested interests. In U.S. society, the medical- industrial complex functions economically as a source of growth, profit accumulation, investment opportunity, and employment (Estes et al. 1984, pp. 56–70). It also contributes to the human capital needed for productivity and profit by preserving an able-bodied workforce whose work is not sapped by illness (Rodberg and Stevenson 1977), although another interpretation suggests that private capital’s stability is built upon the appropriation of the working-class population’s health (see Navarro 1976, 1982, 1995).

Structure of the Health Care Industry

Industry Components Today’s medical-industrial complex consists of more than a dozen major components: hospitals; nursing homes; physicians (salaried and fee-for-service); home health agencies; supply and equipment manufacturers; drug companies; insurance companies; managed care organizations (HMOs, PPOs, IPAs); specialized centers (urgi, surgi, dialysis); hospices; nurses and all other health care workers; administrators, marketers, lawyers, and planners; and research organizations. In addition to these entities, thousands of other organizations are springing up in long-term care (e.g., case management, respite care, homemaker/ chore, independent living center) and other services for the disabled and aging, including social services that have incorporated health care components such as senior centers.

Changes in the Structure of the Industry

There were a number of significant changes in the structure of the health care industry between the 1970s and 1990s, including

(1) rapid growth and consolidation of the industry into larger organizations;

(2) horizontal integration;

(5) vertical integration;

(4) change in ownership from government to private, nonprofit, and for-profit organizations; and

(5) diversification and corporate restructuring (Starr 1982; McKinlay and Stoeckle 1994). These changes occurred across the different sectors, which are dominated by large hospital, insurance, and managed care organizations.

(1)→ Health care has long been moved from its cottage industry stage with small individual hospitals and solo physician practitioners to large corporate enterprises. Health care corporations are diverse and growing in terms of size and complexity. Hospitals are the largest sector of the health care industry, and while the growth rate in hospital expenditures was increasing rapidly, the number of community hospitals actually declined from 5,830 in 1980 to 5,194 in 1995 (a decrease of 11 percent) (American Hospital Association 1996) (see Table 1). The number of community hospital beds also began to decline going down to 988,000 in 1980 and continuing so that by 1995 there were only 873,000 (a decrease from 12 percent) (AHA 1996).

Nursing homes grew rapidly in numbers of facilities and beds after the passage of Medicaid and Medicare legislation. In 1996, there were 17,806 licensed nursing facilities with 1.82 million beds (Harrington et al. 1998). The number of facilities increased by 25 percent and the number of beds increased by 37 percent between 1978 and 1996. More recently, their overall growth has leveled off, so that growth is not keeping pace with the aging of the population (Harrington et al. 1998).

Table 1
NOTE: : Excludes federal psychiatric, tuberculosis, and other hospitals.
SOURCE: Adapted from American Hospital Association. Hospital Statistics, 1989–1990 and 1996–1997 Editions. Chicago: AHA, 1989, 1996.

Relatively new and influential corporate forces in the health industry are the managed-care organizations such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), and independent practice associations (IPAs). There has been a large growth in HMOs, which provide health care services on the basis of fixed monthly charges per enrollee. In 1984, there were only 337 HMOs with 17 million enrollees. By 1988, there were 31 million members enrolled in 643 HMOs (InterStudy 1989). Managed-care enrollees grew to more than 50 million in 1996 and are expected to reach 100 million by the year 2002. Nearly 75 percent of U.S. workers with health insurance now receive that coverage through an HMO, a PPO, or a point of service plan (PSP) (McNamee 1997). There have been numerous rounds of mergers and acquisitions among HMOs, and some nonprofit HMO corporations have established profit-making operations (Gallagher 1999).

PPOs are modified HMOs that provide health care for lower costs when the enrollee uses participating providers who are paid on the basis of negotiated or discount rates (U.S. DOC 1990). In 1988 there were about 620 PPOs with about 36 million members.

Private health insurance companies constitute another large sector of the health industry. In 1988, the United States had over 1,000 for-profit, commercial health insurers and 85 Blue Cross/ Blue Shield plans (Feldstein 1988). These private insurance organizations, along with HMOs, PPOs, and other third-party payers, paid for 32 percent ($348 billion out of $1,092 billion) of the total expenditures in 1997 (Srinivasan et al. 1998).

Physician practice patterns changed rapidly between the 1970s and 1990s, moving toward larger partnerships and group practices. Eighteen percent of physicians were in group practices (with three or more physicians) in 1969, compared to 28 percent in 1984 (Andersen and Mullner 1989). It is estimated that about 75 percent of all practicing physicians are part of at least one qualified health management organization (U.S. DOC 1990). Thus, physicians are moving toward larger and more complex forms of group practice. In addition, physicians are actively involved in the ownership and operation of many of the newer forms of HMOs, PPOs, IPAs, and other types of corporate health care activities (Relman 1980; Iglehart 1989).

(2)→ The major changes in corporate arrangements have been the development of multiorganizational systems through horizontal integration. The formation of multihospital systems has grown tremendously within the industry. Ermann and Gable (1984) estimated there were 202 multihospital systems controlling 1,405 hospitals and 293,000 beds in 1975 (or 24 percent of the hospitals and 31 percent of all beds). In 1997, there were 280 multihospital systems controlling 1,514 hospitals, and 543,588 beds (Table 2). This represents a 39 percent increase in the number of multihospital systems, a small (7 percent) increase in the number of hospitals, and an 86 percent increase in the number of beds between 1975 and 1997.

Table 2
SOURCE: Adapted from American Hospital Association. Guide to the Health Care Field. 1997–1998 Edition. Chicago: AHA, 1997, Table B3.

Multihospital corporations are becoming consolidated, with large companies controlling the largest share of the overall hospital market. Most of the recent increase in these systems has been the result of purchases or leases of existing facilities and mergers of organizations, rather than of construction of new facilities.

(3)→ Vertical integration involves the development of organizations with different levels and types of organizations and services. One such type of integration has involved the linkage of hospitals and health maintenance organizations and/or insurance companies. For example, National Medical Enterprises owned hospitals, nursing homes, psychiatric hospitals, recovery centers, and rehabilitation hospitals (Federation of American Health Systems 1990). There has also been an increase in the number of academic medical center hospitals that have relationships with proprietary hospital firms (Howard S. Berliner and Burlage 1990, p. 97). Many of the major investor-owned health care corporations are diversified, with many different types of health care operations.

(4)→ Between the 1970s and the 1990s the organizational side of health care witnessed a surge in the growth of both for-profit and not-for-profit health care delivery corporations, initially in hospitals and later extending to other types of health organizations. The ownership of hospitals shifted from public to nonprofit and for-profit organizations (see Table 1). The percentage of government-owned community hospitals dropped from 30 percent of the total community hospitals in 1980 to 26 percent in 1995, and the percentage of total beds declined from 21 percent to 18 percent during the same period (AHA 1996). In contrast, the percentage of proprietary facilities increased from 13 percent to 14 percent, and the percentage of proprietary beds increased from 9 percent to 12 percent, of the total during the 1980–1995 period. The percentage of total U.S. hospitals owned by nonprofit corporations increased from 57 percent to 60 percent during the period, while the percentage of beds remained at 70 percent (AHA 1996). Of the total 280 multihospital systems in 1997 (down from 303 systems in 1988), investor-owned systems controlled 40 percent of the hospitals and 27 percent of the beds, compared to nonprofit facilities (AHA 1997). The federal government controlled 9.8 percent of hospitals and 13 percent of beds, while nonprofit organizations controlled 50 percent of hospitals and 59 percent of beds (AHA 1997). We note that this represents a 3 percent decrease in the number of hospitals and a 6 percent decrease in the number of beds in multihospital systems controlled by investor-owned systems since 1988.

Nursing homes have the largest share of proprietary ownership in the health field (except for the drug and medical supply industries). In 1997, some 65 percent of all nursing homes were profitmaking, 28 percent were nonprofit, and 7 percent were government-run (Harrington et al. 1999). By 1997, chains owned 54 percent of the total nursing home facilities.

For-profit companies dominate the health maintenance organization (HMO) market. Between 1981 and 1997, for-profit HMOs grew from representing 12 percent to 62 percent of total HMO enrollees and from 18 percent to 75 percent of health plans (Srinivasan et al. 1998). Investor-owned corporations have also established themselves in many other areas of health care, ranging from primarycare clinics to specialized referral centers and home health care. The number of proprietary home health corporations is increasing rapidly, while the number of traditional visiting nurse associations is declining (Estes et al. 1992). In 1982 it was estimated that 14 percent of the Medicare home health charges were by proprietary agencies, 26 percent by nonprofit organizations, 32 percent by visiting nurse associations, 15 percent by facility-based agencies, and 14 percent by other agencies (U.S. Department of Health and Human Services 1989). By 1996, proprietary agencies accounted for 44 percent of total Medicare agencies, nonprofit care for 37 percent, and government and others for 19 percent (U.S. DHHS 1997). Forty-four percent of home health agencies were part of a multifacility chain. This represents a dramatic shift in ownership structure within a sixyear period. The changes brought about by the for-profit chains are more extensive than their proportionate representation among health care providers might suggest (Bergthold et al. 1990; Estes and Swan 1994). By force of example and direct competition, for-profit chains have encouraged many nonprofit hospitals and other health entities to combine into chains and convert to forprofit status (Dube 1999).

(5)→ Diversification of health care corporations is continuing to occur. Some large hospital corporations have developed ambulatory care centers (such as Humana, which later sold its centers), while others have developed their own HMOs or insurance. By the mid-1980s, many experts expected America’s health care system to be dominated by the four largest for-profit hospital chains: Hospital Corporations of America (HCA), Humana, National Medical Enterprises, and American Medical International. By the late 1990s, only Humana and HCA were left standing, and HCA had already merged with Columbia. Eventually HCA Columbia almost collapsed as the result of a scandal over fraud during the late 1990s (Multinational Monitor 1998). Economic problems in the late 1980s resulted in some industry restructuring, by scaling down operations and spinning off substantial segments (Ginzberg 1988).

In the 1990s, this cycle repeated itself, as the frenzy of mergers and acquisitions has produced ever-greater desires for cost cutting and restructuring. One report states that much of this drive for cost containment stemmed from drug companies’ raising prices and from an increase in patient visits to doctors (utilization costs) (Hayes 1997). High stock values and the desire to improve market share have catalyzed many health care firms to seek growth through mergers and acquisitions. The number of mergers among health services (483) and HMO companies (33) peaked in 1996. These mergers were valued at $27 billion and $13.3 billion, respectively (Hayes 1997).

As HMOs grow, it has become clear that their primary goals are market control, profit making, and cost containment (through capitation and other mechanisms). For example, the merger of Aetna and U.S. Health care in 1996 put a ‘‘corporate giant in control of the care of 1 in 12 people in the United States’’ (Slaughter 1997, p. 22). In the years 1994–1999 a dozen companies were merged or acquired by six of the biggest firms: Aetna, Cigna, United HealthCare, Foundation Health Systems, Pacificare, and Wellpoint Health Networks.

As managed-care organizations became the dominant player in the health care industry in the 1990s, both doctors and patients began to voice complaints about the system. Many patients felt that they were no longer able to receive the quality time and personal care of a primary physician, because the physicians had to provide hurried treatment to patients in order to maintain efficiencies demanded by HMOs (Managed Care Improvement Task Force 1998). For their part, many doctors argued that capitation and other structures introduced by HMOs limited their freedom to make treatment decisions.

Many doctors and patients argued that these trends were producing lower-quality care (Dao 1999, p. A1). Additionally, registered nurses were increasingly being used in place of doctors to lower labor costs. Registered nurses, in turn, were also being replaced with less skilled and lower-paid personnel. In response, both doctors and nurses have begun a fervent effort to unionize (Slaughter 1997). While some critics argue that the impacts of this growth at all costs by both for- rofit and nonprofit organizations are often devastating to communities (Bond and Weissman 1997; Kassirer 1997), others find few negative effects (Fubini and Limb 1997).

Financial Status and Profits

The private health care sector was marked by great volatility and growth in the 1990s. Forbes’s annual report on investor-owned health corporations shows that the median five-year average return-on-equity for health corporations was 14.6 percent, well above the 10.5 percent for all U.S. industries (Condon 1998) (see Table 3). Median health industry sales for investorowned companies grew 8.8 percent for 1997 and at a 11.1 percent rate for the five-year average. Earnings per share were 15.5 percent in the most recent twelve months, compared with 8.6 percent for the five-year average. The earnings per share were higher than the 14.9 percent earnings for all U.S. industries in the most recent twelve months in 1997 (Condon 1998).

Table 3
NOTE: : D-P: Deficit to profit. NM: Not meaningful. *Four-year average.
SOURCE: Adapted from Forbes, January 12, 1998, pp. 176–182.

The Forbes financial reports for the largest health corporations are shown in Table 3 for three different sectors of the industry: health care services, drugs, and medical supply companies (Condon 1998; Hayes 1998). The most profitable health care service corporation in 1989 was Humana, which owns both hospitals and insurance companies. In 1989 its group health insurance division had almost 1 million members and a $4 billion operating profit (Fritz 1990). The most profitable health care service corporation in 1997 was HBO and Company, while Oxford Health Plans had the strongest five-year average.

While large investor-owned HMOs are growing each year, the 1990s were tumultuous financially. As Forbes Annual Report on American Industry put it, ‘‘Health care providers are supposed to make people well, but many of these companies are very sick themselves’’ (Hayes 1998, p. 180). Although Oxford Health Plans had the higher fiveyear average, between July 1997 and January 1998 its stock lost over 80 percent of its value. Similarly, the number two–ranked company, Mid Atlantic Medical Services, saw its stock drop by more than 50 percent of its value in a year’s time. Rapid growth, through mergers, acquisitions, and internal sales, ‘‘eventually outstripped management’s ability to run these companies’’ (Hayes 1998, p. 180).

Earnings per share of drug companies were at 15.8 percent in 1997, which was up from the five year average of 11.9 percent (Condon 1998). Return on equity reported for drug companies was at 11.7 percent in 1997, significantly less than the 14.3 percent on average over the previous five years (Condon 1997). On the other hand, earnings per share of medical supply companies were doing well at 15.5 percent in 1997, far better than their five-year median earnings of 4.7 percent. In 1989 a number of large drug company mergers occurred, particularly between U.S. firms and foreign corporations such as Genentech, Inc., and Roche Holding, Ltd., of Switzerland (Southwick 1990). These international mergers continued into the 1990s.

Although the biotechnology industry did not show overall profits in 1989, the sales growth rates were strong, and some companies had high profit rates, such as Diagnostic Products, with a 22.3 percent earnings per share and 23.6 percent return on equity in 1989 over the previous year (Clements 1990, p. 182). Biotechnology saw an upsurge of economic growth and media coverage when several new developments emerged in the 1990s. The first was the introduction of ‘‘gene therapies’’ whereby scientists could modify a person’s genetic makeup to fight against otherwise deadly or incurable diseases such as cancer and Alzheimer’s. The second was the launching of the Human Genome Project, a massive effort by scientists in government and industry to ‘‘map’’ the structure of the human genetic code. The third, was the announcement, by a Scottish scientist in 1997, that he had successfully cloned a sheep from another sheep’s DNA.

While all these developments signaled the importance of biotechnology in the future of health care research and policy, some observers were critical of these technological ‘‘advances.’’ First, the cloning of animals like sheep leaves open the distinct possibility that human beings might soon be cloned. The prospect of this event raised dire concerns among bio-ethicists, politicians, scientists, and religious leaders during 1997, and President Bill Clinton issued a worldwide call asking scientists to voluntarily refrain from any such activities. Second, some critics have noted that the Human Genome Project has been associated with efforts to ‘‘locate’’ genes believed not only to be the cause of certain diseases like breast cancer, but also those genes believed to be associated with certain types of deviant, or criminal, behavior. Focusing on the genetic ‘‘causes’’ of certain diseases and social behaviors raises many problematic scenarios for public policy (for example, defining breast cancer as genetically based, rather than being rooted in social structures and the production of toxins by industry). Third, some biotechnology companies have been associated with efforts to patent life forms around the globe, including parts of the human body—prompting some critics to label this practice ‘‘biopiracy’’ or ‘‘biocolonization’’ (Kimbrell 1996). Taken together, these charges suggest that, through biotech, the medical-industrial complex is charting revolutionary territory that has allowed private interests to define, claim ownership over, and even create life on this planet. Despite these criticisms, biotechnology stocks continue to rise. As noted, the pharmaceutical industry alone traded upward of $110 billion globally in 1997, while the overall health expenditures topped $1 trillion by the end of the 1990s. Some analysts project health costs to more than double by 2015 to $2.3 trillion, of which the government share will be between 25 and 50 percent (Pardes et al. 1999).

In summary, the 1970s, 1980s, and 1990s were decades of enormous growth in health care spending and the rationalization of health care service delivery, with the formation of large, complex, bureaucratically interconnected units and arrangements that reached well beyond the hospital and permeated virtually all sectors of the health care industry. At the same time, new sectors emerged (e.g., genetic research and subacute care), bringing additional industry developments. This vertical and horizontal integration of medical organizations and industries, combined with the revival of market ideologies and government policies promoting competition and deregulation, have profoundly altered the shape of U.S. health care delivery. As we enter the new millennium, these changes continue to signal a fundamental transformation of American medicine and a rationalization of the system under private control that was described by Paul Starr (1982).

The Need for Regulation

The federal government has been playing and continues to play a crucial role in the development of the medicalindustrial complex. After World War II, the federal role expanded as Congress enacted legislation and authorized money for research, education, training, and the financing of health services. The passage of Medicare and Medicaid in 1965 was pivotal in expanding the medical-industrial complex, as government became the third-party payer for health care services (Estes et al. 1984). As a consequence, public demand for health care among the aged, blind, disabled, and poor (all previously limited in access) was secure. Medicare and Medicaid provided the major sources of long-term capital financing for hospitals and contributed to the marked increase in service volume and technology, as well as to the continued oversupply of physicians (McKinlay and Stoeckle 1994). Thus, federal financing of health care has performed the very important functions of sustaining aggregate demand through health insurance programs, protecting against financial risks, subsidizing research and guaranteeing substantial financial returns, supporting the system’s infrastructure through training subsidies and capital expansion, and regulating competition through licensure and accreditation (LeRoy 1979).

In addition to government spending, thirdparty insurance offered by Blue Cross/Blue Shield and private commercial companies covered most of the remaining inpatient hospital expenditures and a significant proportion of physician costs. The cost-based service reimbursement by private insurers, Blue Cross, and Medicare created and sustained strong cash flows in the hospital industry (Ginzberg 1988). With public and private sector third-party payments covering 90 percent of all inpatient hospital expenditures, the hospital business had become virtually riskfree.

In the 1980s and 1990s, two other forces were responsible for the dramatic changes in the medical- industrial complex: a change in the ideological climate with the election of President Ronald Reagan, President George Bush, and later President Bill Clinton, and changes in state policies to promote privatization, rationalization, and competition in health care (Estes 1990). These changes contributed to increases in the proportion of services provided by proprietary institutions (Schlesinger et al. 1987).

While policies of the 1960s and 1970s encouraged a form of privatization built on the voluntary sector (Estes and Bergthold 1988), President Reagan, President Bush, and President Clinton shifted the direction and accelerated privatization. In the 1980s and 1990s, the form of privatization was government subsidy of a growing proportion of for-profit (rather than nonprofit) enterprises (Bergthold et al. 1990). There was also privatization in the form of a transfer of work from the formal sector of the hospital to the informal sector of home and family with ambulatory surgery and shortened lengths of hospital stays (Binney et al. 1993). Regulatory and legislative devices were important in stimulating and accelerating privatization in the health and social services. The Omnibus Reconciliation Act of 1980 and the Omnibus Budget Reconciliation Act of 1981 contributed to competition and deregulation, private contracting, and growth of for-profits in service areas that were traditionally dominated by nonprofit or public providers (e.g, home health care).

President Clinton introduced a health care reform plan in 1993 that ultimately failed, giving way to a private sector–driven market reform managed care, promoting a system that many contend benefits investors over patients, doctors, and community hospitals (Andrews 1995). Given the longterm historical role of the private, nonprofit sector in U.S. health and social services since the earliest days of the republic and the rapid organizational changes of the 1980s and 1990s, vertical and horizontal integration have blurred boundaries between the nonprofit and for-profit health care sectors. For-profit entities have nonprofit subsidiaries, and vice versa, and conceptual and structural complexities have multiplied, rendering impossible the simple differentiation of public from private. It is noteworthy that government-initiated privatization strategies did not reduce public sector costs (see the section entitled ‘‘Financial Status and Profits’’).

The distinction between for-profit and nonprofit is less meaningful when both organizational forms appear to be pursuing greater revenues through cost cutting and mergers. Eight of the ten largest health care systems (by net patient revenues) in 1997 were nonprofits; that same year, four out of the ten largest health care systems (by number of hospitals owned) were also nonprofits (Bellandi and Jaspen 1998, p. 36). Whether notfor- profits are still oriented toward the needs of the community is unclear, as many of these organizations (both insurance plans and hospitals) are undergoing ‘‘conversions’’ to for-profit status (Marsteller et al. 1998).

The concern that many communities have is that these conversions may mean less attention to the health needs of local residents. The increase in conversions has ‘‘heightened the need for accountability regarding the accurate determination and disposition of assets developed with the assistance of tax subsidies for nonprofit medical entities such as Blue Cross’’ (Estes and Linkins 1997, p. 436). Federal and state laws require that their assets remain in the charitable sector and continue to be used for the community’s benefit. Twenty-three states now have conversion laws clarifying the authority of attorneys general to regulate these conversions. Conversion laws mandate varying degrees of public participation and public disclosure, but often are best implemented when there is an active community-based activist presence to monitor the organization’s practices.

From social movements to the federal government, institutions across the nation are recognizing the increasing need for monitoring and regulation of the myriad branches of the medical-industrial complex. As noted earlier, physicians are advocating new legislation and even beginning to unionize against HMOs. Unfortunately, often when regulation exists, it is easily circumvented. For example, the Health Insurance Portability and Accountability Act of 1996 was intended to protect Americans who change or lose their jobs by assuring portability of plans across groups and into the individual market. It was also intended to protect people against denial of coverage for preexisting conditions. However, many insurers have skirted this law by denying commissions to their agents who sell insurance to people with medical problems (Pear 1997).

In other cases, there is little to no regulation of purchasers, such as large employers who self-insure under the Employment Retirement Income Security Act (ERISA) of 1974. These employers are exempt from state insurance laws and are bound by no federal regulation in this area. More than 125 million Americans who have HMO coverage cannot sue their providers for punitive damages. As Time magazine recently reported, this represents a ‘‘clear subordination to corporate interests’’ (Howe 1999, p. 46). Furthermore, the continuing rapid pace of mergers and acquisitions in the health care industry has created a consolidation of markets that raise questions about the need for antitrust policies directed at this sector.

At the federal level, the President’s Advisory Commission on Consumer Protection and Quality in the Health Care Industry has called for a ‘‘consumer bill of rights,’’ while others clamor for‘‘patient’s bill of rights.’’ These proposals would provide, for example, the right to sue HMOs for damages, prohibitions against negative financial incentives, and external reviews of patient complaints. Whether this proposal will ever become national legislation is unclear. But as, under the ‘‘New Federalism,’’ previously federal responsibilities are ‘‘devolved’’ to the states, it is certain that fifty separate governments will have great difficulty coherently regulating a health care system for the entire nation. This is especially troublesome because of the growing numbers of the uninsured and those in need of long- erm care (Estes and Linkins 1997).

Long-term care (LTC) is an area of health policy in need of greater attention as the age distribution of the population changes, so that the number of persons over 65 and over 85 is increasing rapidly. Medicare, Social Security and other entitlement programs affecting the elderly have been the focus of the ‘‘devolution revolution’’ (Estes and Linkins 1997) and raise serious questions about the quality and accessibility of LTC under managed care. There are profits to be made in this sector of the industry as well. One publication referred to 1997 as the ‘‘year of assisted living’’ because seven of the top ten health care provider organizations were assisted-living companies and half of them posted returns of 50 percent or greater (SeniorCare Investor 1998). LTC will have to meet the ‘‘bottom line’’ criterion of ‘‘cost-saving’’ or ‘‘profit generation,’’ and this is likely to produce problems for those in need of these services. Indeed the needs of all less powerful groups— the elderly, the poor, the working and middle classes, women, and people of color—are increasingly being confronted by these business directives as well. Regulation of health care institutions in the interests of these marginalized groups is especially difficult when the American Medical Association is second to none in money spent on lobbying the Congress and state legislatures (Jaspen 1999).

The U.S. Medical-Industrial Complex in a Global Context

The U.S. health and health care systems rank near the bottom of all industrialized nations on a number of key dimensions. By comparison, the health of U.S. citizens is poorer and the number of underinsured and uninsured individuals is greater than in any other industrialized nation. Among the top 24 industrialized nations, the United States ranks sixteenth in life expectancy for women, seventeenth for men, and twentyfirst in infant mortality (Andrews 1995, p. 38). A Harris poll indicated that the citizens of Canada, western Europe, the United Kingdom, and Japan report much higher satisfaction with their health care systems than do Americans (Isaacson 1993). Additionally, compared with other nations, doctors in the United States receive much higher incomes relative to the average worker. For example, in 1987 the income ratio of doctors to the average worker in the United States was 5.4, while in Canada it was 3.7 and in Japan and the United Kingdom it was 2.4 (Isaacson 1993). This poor performance of the United States on health indicators is ironic, given that the United States spends more money on its health care system than any other nation in the world.

Multinational health enterprises are an increasingly important part of the medical-industrial complex, with investor-owned and investor-operated companies active not only in the United States but also in many foreign countries. In 1990 a report showed 97 companies reporting ownership or operation of 1,492 hospitals with 182,644 beds in the United States and 100 hospitals with 11,974 beds in foreign countries (FAHS 1990, pp 16–17). The four largest for-profit chains owned two-thirds of the foreign hospitals (Berliner and Regan 1990). Pharmaceutical firms have also become major global corporate players. In 1990, foreign control over pharmaceutical production was 72 percent in Australia, 61 percent in the United Kingdom, 57 percent in Italy, and 30 percent in the United States (Tarabusi and Vickery 1998). The total value of global pharmaceutical exports and imports is estimated to be in excess of $110 billion (Tarabusi and Vickery 1998). The effects of these developments in foreign countries and the profit potential of these operations are not clearly understood (Berliner and Began 1990).

Because of the pluralistically financed health care system in the United States, administrative costs are much higher than those of the national and publicly financed health care systems of virtually all other Western industrialized nations, with the exception of South Africa. U.S. health care expenditures were increasing at an alarming rate until around 1993, when the rate of growth in expenditures began to slow. However, this trend is expected to reverse itself, and one study projects that ‘‘health spending is expected to rise as a share of gross domestic product (GDP) beginning in 1988, climbing from 13.6 percent in 1996 to an estimated 16.6 percent by 2007’’ (Smith et al. 1998, p. 128).

Examining the U.S. medical-industrial complex in a comparative context provides an understanding of the role of the welfare state and government vis-à-vis civil society and private capital. What has become clear is that the unique problems the U.S. medical-industrial complex has created are rooted in the subordination of the state and civil society to corporate interests. Other nations whose health care systems are much more effective are marked by the state’s taking an active role to restrict the profit motive in health insurance, ‘‘or they simply never let a commercial market develop’’ (Andrews 1995, p. 36). This is because voluntary insurance in many other countries historically preceded public legislation, and these insurance funds were linked to labor unions, political groups, and religious groups—not to private companies and health care providers, as in the United States. In these cases, government policy was, and remains, heavily influenced by nongovernmental organizations (NGOs), namely religious and labor groups. The medical-industrial complex in particular and corporate-civil society relations in general in the United States are much less democratic largely because of the lower levels of mobilization by trade unions and other NGOs. Government agencies in the United States can learn from other nations and begin to implement policies that leverage the power of the state and NGOs in ways that bring a greater balance among the stakeholders in the medical-industrial complex.

Issues Raised by the Medical-Industrial Complex Commodification. Commercialization, proprietarization, and monetarization are terms used to describe an increasingly salient dynamic in the medical-industrial complex: the potentially distorting effects of money, profit, and market rationality as a (if not the) central determining force in health care. After three decades devoted to market rhetoric, cost containment, and stunning organizational rationalization, the net result is the complete failure of any of these efforts to stem the swelling tide of problems of access and cost. For example, while national health care expenditures make up around 15 percent of the GDP, the number of uninsured Americans was fully 43.4 million, or 16.1 percent of the population in 1997—the highest level in a decade (Kuttner 1999). Moreover, there are alarming increases in the uninsured population among African-Americans, Latinos, and the middle class (Carrasquillo et al. 1999). Of those Americans who do have insurance, a recent study found that the number of persons insured by the private sector is much less than previously believed. While many studies had estimated that 61 percent of the insured received coverage through the private sector, Carrasquillo and colleagues (1999) found that the public sector subsidizes much of this coverage so that, in fact, only 43 percent of the population receives insurance through the private sector. Thus, not only is the burden on the state greater than previously thought because of this subsidy to the private sector, but the general decline in private insurance coverage will also produce further strains on the government’s budget.

The rapidly growing health care industry is creating strains on the economic system while it also is creating a financial burden on government, business, and individuals through their payments for health services. These strains are occurring simultaneously when, in 1999, a huge federal deficit has been turned into a surplus, an event of historic significance. The budget surplus has produced a combination of euphoria and vigorous debate over what the government should do with it. This surplus emerged against the backdrop of an unusually high economic growth rate and strong general U.S. economy as we enter the new millennium. Responses to these deficit strains and fluctuations have included cutbacks in services and reimbursements; cost shifts onto consumers; and alterations in the structure of the health care system itself to accord better with a competitive, for-profit model. The competition model as a prescription for the nation’s health-care woes has restricted access to health care and raised questions of quality of care (Bond and Weissman 1997; Harrington 1996; Kassirer 1997). Cost shifting to consumers is increasingly limiting access to needed services for those with less ability to pay. Managed care has not delivered the cost savings it promised, and the Health Care Financing Administration acknowledges that Medicare does not benefit from cost reductions from HMO enrollment of elders due to continuing adverse risk selection (DePearl 1999).

The juxtaposition of the commercial ethos familiar in fast-food chains with health care collides with traditional images of medicine as the embodiment of humane service. Investor-owned health care enterprises have elicited a number of specific criticisms. It has been argued that commercial considerations can undermine the responsibility of doctors toward their patients; can lead to unnecessary tests and procedures; and, given other financial incentives, can lead to inadequate treatment. The interrelationships among physicians and the private health care sector, particularly forprofit corporations, raises many issues about the effects on quality of care and health care utilization and expenditures. Many have argued that the potential for abuse, exploitation, unethical practices, and disregard of fiduciary responsibilities to patients is pervasive (Iglehart 1989). Legislation has even been introduced in Congress that would prohibit physicians from referring patients to entities in which they hold a financial interest and from receiving compensation from entities to which they refer patients (Iglehart 1989). In the late 1990s several versions of a ‘‘patient’s bill of rights’’ were considered at the state and federal levels of government.

Critics of for-profits argue that such ownership drives up the cost of health care, reduces quality, neglects teaching and research, and excludes those who cannot pay for treatment. Opponents of the market model for health care reflect diverse interests, including members of the medical profession seeking to preserve their professional autonomy, advocates for access to health care for the poor and uninsured, those concerned about the impact of profit seeking on quality of care, and many others. As government and business attempt to restrain health care spending, cutting into profits and forcing cost reductions, these concerns intensify.

The medical-industrial complex is an inherently fascinating topic for sociological analysis because it underscores many of the less obvious dimensions of health care. Profits, power, and market control are not terms that have traditionally come to mind when the average person in the United States talked about their health care provider (although this is changing as we observe the managed-care ‘‘backlash’’). Yet, these are some of the primary goals of those organizations administering our medical care. Sociology itself arose as an effort to wrestle with the myriad social impacts of nineteenth century industrialization (Durkheim [1893] 1984; Marx [1867] 1976). Early sociologists were especially concerned about how changes in communities were created by industrial production. Over the last century, sociologists have maintained a particular interest in the connection between advanced capitalism and the emergence of specific types of work, formal organizations, political systems, families, and cultural beliefs. An examination of the medical-industrial complex is therefore one of the more recent attempts to refocus core sociological questions about community, power, stratification, and social change.

Underlying this early sociological research on the impact of industrialization was an interest in power. How does power get accumulated and applied in a market-based society? How does it get distributed unevenly to social groups? To what ends do empowered social groups apply their power? One school of thought has been that industrial production skews power to an elite class (Domhoff 1998; Gramsci [1933] 1971). Max Weber’s theory of bureaucracy, for example, suggested that this was an organizational form that pervades all social institutions. Its emphases on rationality, efficiency, predictability, calculability, and control (Weber [1921] 1961) were in part seen as a social advance over arbitrary religious, charismatic, and personalized forms of authority. Later analysts of bureaucracy, in contrast, saw this formalization of organizations as a dehumanizing and antisocial mechanism.

Issues for sociological investigation include the systematic identification of the ways in which the new commercial practices and organization of health care affect health care delivery. Organizational studies are needed to disentangle the effects of organizational characteristics (e.g., tax status and system affiliation) on the outcomes of equity, access, utilization, cost, and quality of care. The effects on provider-patient interactions of these structural and normative changes in health care require investigation as well. A general sociological theory of the professions will emerge from understanding the ways in which the dominant medical profession responds to the ongoing restructuring of health care and accompanying challenges to its ability to control the substance of its own work, erosions in its monopoly over medical knowledge, diminishing authority over patients resulting from health policy changes, major technological and economic developments, and changes in the medical-industrial complex. Finally, sociologists must confront the coming biotechnological revolution and its impacts on society, human health, and the environment. The corporatization of health care and health-related research and the medical industrial complex are topics of great interest to scholars studying social movements, organization behavior, stratification, health and illness, and science and technology.

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This Aricle was Written by
CARROLL L. ESTES
CHARLENE HARRINGTON
DAVID N. PELLOW

This Article was Published in
ENCYCLOPEDIA OF SOCIOLOGY
Second Edition
A Book by

EDGAR F BORGATTA
Editor-in-Chief
University of Washington, Seattle

AND

RHONDA J. V. MONTGOMERY
Managing Editor
University of Kansas, Lawrence

 

 
 
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