I.              INTRODUCTION 


  Real work 


V.              RECOMMENDATIONS 

VI.         RESULTS 




By Charles C. Smith, Jr. M.D.
On April 10, 1984.


     On April 8, 1975, I presented a paper to this society entitled “A Colossal Mistake”, the story of the AMA’s opposition to voluntary sickness insurance.  At this time, certain principles were expounded by me as a result, such as:

1.              “Physicians worry about fee restriction.”

2.              “Hospitals favor anything that creates more possible patients and a way to pay for them.”

3.              “When organized medicine takes a stand, the surgeons are the first to take a dive!”

Now, nine years later, the nation is in a health care cost crisis with 65% of the public, in an August of 1983 AMA poll, feeling that cost is the main problem.  Quality of care is a distant second at 14%, and distribution of physicians not an issue.  The figure for national health expenditures in 1982 was $322.4 billion or 10.5% of the Gross National Product.

     Though I had tentatively selected this topic before then, a day spent in Frankfort in the House Chamber before the State Senate Committee on Banking and Insurance during a one-day program on “Health Care Costs” solidified my choice.  It is very clear that at present the government-industrial complex feels that medical care costs are in need of attention.  At the time of my previously mentioned paper, I first became aware of the Committee on the Costs of Medical Care because of its recommendations about a group payment basis for medical care.  I thought, therefore, it might be illuminating to look back at an era 50 years ago and see what lessons might be learned.

     To set the stage, I again returned to the archives (slightly less dusty) on the top floor of the AMA building in Chicago and again visited Ms. Marguerite Fallucio, still a human dynamo.  I had forgotten that the elevator only goes to the 8th floor and you have to walk up to the attic to get there.  Ms. Fallucio then got out all 28 volumes of the Committee’s report for me.  I will not pretend that I read all 28 of the volumes, which were published in 1932, and seemed to have been little disturbed.  I was very impressed by the thoroughness of the studies, however. 1

     To set the background for the development of the Committee and its work, one has to look back to 1910-1920 when the nations of the world had moved toward compulsory health insurance with the United Kingdom the most recent one in 1911 on the basis of legislation introduced by Lloyd George.  The official position of the AMA in 1917 was embodied in a resolution that the House of Delegates cooperate in the molding of compulsory health insurance laws.  The resolution was presented by Dr. Alexander Lambert, N.Y., personal physician to Teddy Roosevelt. 

After which time he was progressively member of the faculty in Physiology, Chairman of the Department of Medicine, Dean and President of the entire university, President of the AMA in 1923, President of the AAMC and Founder of the Palo Alto Medical Foundation and Clinic. He obviously was to be the needed “figurehead”. Other notable choices were Winthrop Aldrich, President of Chase National Bank; John Frey, Secretary-Treasurer, AFL, William T. Foster, Director of the Pollack Foundation in Economic Research; Olin West, M.D., Executive Secretary, AMA and 15 physicians plus two dentists in private practice. Five physicians from Public Health were chosen and the director of research for the Milbank Memorial Fund. Representatives from insurance, hospital, nursing, pharmacy sources were appointed and six members from positions. They numbered 49 in all.

     The full time staff was headed by Harry H. Moore of Washington who in 1927 published “American Medicine and the People’s Health” while a member of Public Health Service. His main tenets were the need for a system to distribute medical care and an insurance plan to pay for it.

     Other fulltime people I was able to trace in the literature of the time included the Chief of research, I.S. Falk, Ph.D. Dr. Falk had been a member of the AALL, American Association for Labor Legislation, organized in 1906 to drive for the national health insurance. Later, in 1935, he was a member of the Technical Committee in the Department of Labor to develop a comprehensive national health program. Then in 1950, he had become head of Social Security’s Bureau of Research and Statistics and drafted the forerunner plan to medicare.4 By 1966, he was a Professor of Public Health at Yale, publishing an article on labor unions in Leslie DeGroot’s book on medical care complied from the New England Journal series on the subject. 5

     The final full time person about whom we can learn is C. Rufus Rorem, Ph. D., and C.P.A. born in small-town Iowa, educated at Oberlin (his Norwegian immigrant parents believed in education) and receiving a Ph. D. at the University of Chicago in Economics, he was a scholar who theorized with a bent for systematic application. In 1928, he met Michael Davis, 15 years his senior. Davis, as earlier mentioned, was with the Rosenwald Fund. Davis was in charge of the section on medical economics and was looking for a staff member who would do a study of Capitol Investments in hospitals.6

     Rorem in a 1970 interview said;” From my point of view, we had picked the key point where all the conflicts and changes were going to come.” He accepted Davis’ offer and did a landmark study under the auspices of the CCMC. Interviewed again in 1970, Rorem said that he was not conscious of the nonprofit sector being better than government domination of health services. He felt that the private sector was good for experimentation-“Governments tend to emphasize equity, not efficiency, certainly not originality. They do not provide the basis for much experiment or innovation.”6

     This seems to be perhaps a critical juncture in what turn the committee would take, for Rorem’s attention next turned to hospital prepayment. As long as hospitals bills were unpredictable, people would complain no matter how efficient the management or how reasonable the bill. Rorem was then to turn his attention to prepayment.  It is interesting to note that the authorship of five of the 28 volumes of the CCMC were Rorem’s; the first of which was #7:  “Capital Investment in Hospitals; The place of “Fixed Charges in Hospital Financing and Costs”.  Only one other staff member authored as many and that person was I.S. Falk.

     Rorem’s other volumes were Private Group Clinics, The “Municipal Doctor” system in Saskatchewan, The Costs of Medicines, and the Costs of Medical Care.

     Rorem was eventually to become Executive Director of the Blue Cross Plan Commission for 10 years, 1936-1946.

     What about Michael Davis?  In 1936, Davis, who had been a friend of Rosenwald’s son, was given custody of over $175,000 for 4 years as the Rosenwald Fund terminated its Division of Medical Economics.  This he spent on his Committee for Research in Medical Economics concerned with promotion of national health insurance and established the Journal of Medical Care. 6

     I have spent a good deal of time on these few people since subsequent history would indicate they probably had the most to do with the direction the Committee took and the subsequent course of American medicine.

     The support for the work of the CCMC was provided by foundations:  The Carnegie Foundation, The Josiah Macy, Jr. Foundation, The Milbank Memorial Fund, The New York Foundation, The Julius Rosenwald Fund, The Russell Sage Foundation, and The Twentieth Century Fund to the total of $1,000,000.  The AMA, ADA, Metropolitan Life Insurance Company conducted supplementary studies.

     What was found by the CCMC?  First, the medical dollar was found to be divided as follows:  30% physicians, 23% hospitals, 18% medicines.  Now it is 19% physicians, 42% hospitals, 9% nursing home care.  Then the total medical bill was 3.6 billion and GNP 103.1 billion for 3.5%.  Over the next five years, the GNP fell to 55 billion.  The federal budget, by the way, was 3.1 billion.  The present one is 854 billion.  There were 121,000 physicians in private practice for 123 million plus people – now there are 373,544 for 230 billion.  Now there is one physician to 609 people nationwide; then, this was close to 1/1000.  The big difference was the misdistribution of care- the lower the income group the less medical care received.  Because few people could afford medical care, the average practitioner had a low income:  One-half of all GP’s made less than $2500 net with the average $4000.  The majority of family income were below $3000.

     The other major finding dealt with wide variation in charges making the distribution of costs very uneven among families.  This, of course, depended on the occurrence of major illness in the individual family and pertains to Rorem’s concern about establishing “fixed charges” in order to distribute the medical bill more evenly.

     In order to look at how medical care was distributed, the CCMC surveyed and published various volumes entitled:

1.              Statistical Data on Medical Facilities in the United states.

2.              Hospital Services for Patients of Moderate Means.

3.              A Survey of Medical Facilities of Shelby County, Indiana, 1929.

4.              A Survey of Medical Facilities of the City of Philadelphia, 1929.

5.              A Study of Physicians and Dentists in Detroit, 1929.

6.              A Survey of Medical Facilities of San Joaquin County, California, 1929.

7.              A Survey of Medical Facilities of the State of Vermont.

8.              Surveys of the Medical Facilities in Three Representative Southern Counties.

To look at some innovative modes of delivery, they looked at:

1.              Medical Care for 15,000 workers and their families:  A survey of Endicott Johnson Worker’s Medical Services, 1928.

2.              Private Group Clinics:  55 private practice associations.

3.              Medical Service of the Homestake Mining Company.

4.              University Health Services:  Cornell, Yale, Michigan, Minnesota, and Oregon State.

5.              A Community Medical Service Organized Under Industrial Auspices in Roanoke Rapids, North Carolina

6.              Organized Medical Services at Fort Benning, Georgia.

They also looked at:

1.              *Midwives, Chiropodists, and Optometrists.

2.              The Healing Cults

3.              The Incomes of Physicians.

*  The Frontier Nursing Service of Kentucky – 818 patients delivered over six years with one death.  The cost was $10.92 per year per person but 95% was collected outside the region.

      The Committee finished its work on time in 1932 and made the following recommendations:


     The Committee recommends that medical service, both preventive and therapeutic, should be furnished largely by organized groups of physicians, dentists, nurses, pharmacists, and other associated personnel.  Such groups should be organized, preferably around a hospital, for rendering complete home, office and hospital care.  The form of organization should encourage the maintenance of high standards and the development or preservation of a personal relation between patient and physician.


     The committee recommends the extension of all basic public health services – whether provided by governmental or non-governmental agencies – so that they will be available to the entire population according to its needs.  Primarily this extension requires increased financial support for official health departments and full-time trained health officers and members of their staffs whose tenure is dependent only upon professional and administrative competence.


     The Committee recommends that the costs of medical care be placed on a group payment basis, through the use of insurance, through the use of taxation, or through the use of both these methods.  This is not meant to preclude the continuation of medical service provided on an individual fee basis for those who prefer the present method.  Cash benefits, i.e., compensation for wage-loss due to illness, if and when provided, should be separate and distinct from medical services.


     The Committee recommends that the study, evaluation, and coordination of medical service be considered important functions for every state and local community, that agencies be formed to exercise these functions, and that the coordination of rural with urban services receive special attention.


     The Committee makes the following recommendations in the field of professional education: (A) That the training of physicians give increasing emphasis to teaching of health and the prevention of disease;  that more effective efforts be made to provide trained health officers;  that the social aspects of medical practice be given greater attention;  that specialties be restricted to those specially qualified; and that postgraduate educational opportunities be increased;  (B) that dental students be given a broader educational background; (C) that pharmaceutical education place more stress on the pharmacist’s responsibilities and opportunities for public service; (D) that nursing education be thoroughly remolded to provide well-educated and well-qualified registered nurses; (E) that less thoroughly trained but competent nursing aides and attendants be provided; (F) that adequate training for nurse-midwives be provided; and (G) that opportunities be offered for the systematic training of hospital and clinic administrators.



     The minority recommends that government competition in the practice of medicine be discontinued and that its activities be restricted (a) to the care of the indigent and of those patients with disease which can be cared for only in governmental institutions; (b) to the promotion of public health; (c) to the support of the medical departments of the Army and Navy, Coast and Geodetic Survey, and other government services which cannot because of their nature or location be served by the general medical profession; (d) to the care of veterans suffering from bona fide service-connected disabilities and diseases, except in the case of tuberculosis and nervous and mental diseases.


     The minority recommends that government care of the indigent be expanded with the ultimate object of relieving the medical profession of this burden. 


     The minority joins with the Committee in recommending that the study, evaluation and coordination of medical service be considered important functions of every state and local community, that agencies be formed to exercise these functions, and that the coordination of rural with urban services receive special attention.


     The minority recommends that united attempts be made to restore the general practitioner to the central place in medical practice.


     The minority recommends that the corporate practice of medicine, financed through intermediary agencies, be vigorously and persistently opposed as being economically wasteful, inimical to the continued and sustained high quality of medical care, or unfair exploitation of the medical profession.


     The minority recommends that methods be given careful trial which can rightly be fitted into our present institutions and agencies without interfering with the fundamentals of medical practice. 


     The minority recommends the development by state or county medical societies of plans for medical care.

Signed:  A. C. Christie, George Follansbee, M. L. Harris, Kirby Howlett, A. L. Morgan, N. B. Van Etten, A. M. Schewettala, Olin West, and Robert Wilson.

     Additional dissent involved eight members who felt that compulsory insurance should be adopted from the start to encourage development of higher standards of medical care for patients included in such a system.

     (It was estimated that a maximum of $3.25 per adult wage-earner per month would be sufficient to pay for health insurance.)

     --Thus in five years, the Committee had accomplished its goal and given the first reliable estimates of national health expenditures and the first reliable breakdown of the “medical dollar”

     --The tenor of the report was such that one can read into it the seeds of everything that led to the health care system we have today, namely:

1.              Health care is the right of every American.

2.              Provision should be made to pay for it through voluntary prepayment and if not enough, governmental subsidy.

3.              The reimbursement of hospitals is paramount, on a cost-plus basis and the practice of medicine should be centered in and about hospitals.

4.              The government should assume all responsibility for public health measures.

5.              Specialty certification should be established and postgraduate medical education expanded.

6.              Hospital administration should become a specialty.

7.              Regional health planning should be established.

--Even though the report was finished at the depths of a national economic depression, this was soon alleviated by the onset of World War II and the post-war expansion of economy. 



  1. Medical Care for the American People:  The Final Report of the Committee on the Costs of Medical Care; November, 1932.

  2. Rayack, Elton; Professional Power and American Medicine:  The Economics of the American Medical Association; World Publishing Co. 1967.

  3. Starr, Paul; The Social Transformation of American Medicine, Basic Books, Inc. 1982.

  4. Edwards, Marvin H.; Hazardous to Your Health, Arlington House, 1972.

  5. DeGroot, Leslie;  Medical Care, Charles C. Thomas, 1966.

  6. Anderson, Odin W.;  Blue Cross Series, 1929:  Accountability and the Public Trust;  Ballinger Publishing Company, 1975.


      --I think the most important principle spawned by this Committee was not at all what was planned.  I think a well-intentioned group of visionaries intended to rationally develop a national health plan through taxation and enlisted the “right” group of citizens to help with this.  I further think that a pragmatic middle westerner named Rorem essentially “sold” his prepayment “fixed charge” method of reimbursement to the Committee and then to the nation.  The system fit very well with the “second wave” of Alvin Tofler, i.e., Industrialization, as hospitals are classic “second wave” structures.  The middle class embraced this plan and would be most benefited by it.  After all, they were the ones who needed it the most.  Three decades later, the middle class would also “buy” Medicare as a means to alleviate the burden of ailing parents and the financial drain they entail.

     So at last we find ourselves, as always, in a health care crisis.  The costs of health care today do not equal Federal Budget outlays as they did in 1929 but are slightly over a third of the value of it.  Indeed they are 10% of the Gross National Product but the things envisioned in 1926 have been achieved.

     At the same time, a sister nation has been described by Bill Schwartz in his soon to be released book, “Painful Prescription:  The Rationing of Health Care”.  Presently, per capita, the British take half as many x-rays, have one-sixth the CT capability, do one-tenth the coronary bypasses, have one-tenth the ICU beds and do no dialysis over age 55.

     The question for the 80’s is:  Do we need a Committee on the Consumption of Medical Care, perhaps chaired by Ed Pellegrino, and staffed by Richard Lamm, Chief Executive of the State of Colorado?