Nicholas Bagley
Meticulously researched and a genuine pleasure to read, Nicholas
Parrillo’s book, Against the Profit
Motive: The Salary Revolution in American Government, 1780-1948, offers the
definitive account of a forgotten—but critically important—“revolution” in
American governance. We once allowed government officers to accept fees and
bounties for performing their official duties. As the vices of those payment
methods became more apparent, however, they were discarded in favor of
salaries.
Yet, in framing his narrative as a progression from a world
of piecemeal payment to “the absence of the profit motive in American
government” (p. 362), Parrillo is both too optimistic that we’ve worked fees
out of our system and too modest about the modern-day relevance of his book. As
he fully appreciates, fees and bounties persisted into the early twentieth century
not because policymakers were oblivious to their downsides. They persisted
because they were useful. Fees—Parrillo
calls them facilitative payments—encouraged government officials to offer good
service. Bounties increased the ardor of officials charged with enforcing laws against
a resistant public.
Useful as facilitative payments and bounties are, it would
be odd if salaries had displaced them altogether. And of course they haven’t. What
struck me most about Against the Profit
Motive was how the debates that Parrillo recovers—debates about how best to
use money to properly align the incentives of street-level officers with
broader policy goals—remain so urgent today.
One parallel in particular caught my attention. In discussing
facilitative payments, Parrillo focuses on the central role that examining
physicians played in the system for dispensing pensions to Civil War veterans. To
qualify for a pension, a soldier typically had to secure a physician’s report
documenting some kind of service-connected disability. The government paid the private
physicians (they weren’t federal officers) a fee for each veteran they
examined.
Predictably, veterans learned to avoid the strictest
examining physicians. To attract veterans and earn fees, physicians had to
cultivate reputations for generosity. The result was a fiscally unsustainable
program that lavished taxpayer money on veterans, many with dubious disability
claims. In the 1890s, nearly half of all federal spending went to veterans’
pensions.
Substitute “Medicare” for “veterans’ pensions” and you get
pretty much the same story. With Medicare, too, we have a massive federal
social-welfare program that depends on private physicians for its
implementation. By deciding which treatments are medically necessary for
qualifying individuals, physicians effectively
decide which treatments the government will pay for. Medicare’s physicians
receive fees keyed to the costs of those treatments, spurring the provision of excessive
care of dubious medical value. The result is a massive and unsustainable program
that, today, consumes roughly
15% of the federal budget.
Apart from the nifty historical resonance, what, if
anything, does experience with Civil War pensions teach us about Medicare? A
few things, I think. First, as Parrillo explains, “facilitative payments in the
1800s became instruments ... to shift outcomes systematically in favor of
service recipients” (p. 21). Those payments serve the same instrumental role in
Medicare. The fee-driven system encourages physicians to cater to
beneficiaries—mainly the elderly, who form a potent voting block—by providing
them with lots and lots of medical care. Fees also bolster Medicare’s
legitimacy by soothing fears that government bureaucrats will try to infuse
medical judgment with grubby concerns over money. Again, fees are useful. That’s
why eliminating the fee incentive in Medicare could prove alienating to
beneficiaries, much as shifting examining physicians to salaries felt like a
betrayal to veterans.
Second, the federal government had to put examining physicians
on salary to bring the pensions system under control. Although that’s not a
tenable option for Medicare, successful reform nonetheless depends on adjusting
physicians’ financial incentives in a comparably direct way. All too often,
however, reform proposals don’t scrupulously attend to physician incentives.
The most prominent Medicare reform
on the table, for example, calls for giving beneficiaries “premium-support
credits” that they could use to buy coverage either from traditional Medicare
or a private insurer. The hope is that insurers, to attract more beneficiaries,
would compete with each other to drive down costs. There’s little evidence,
however, that insurers can effectively deploy contractual tools to reshape how
physicians practice medicine—and plenty of reasons (explored in depth here)
to worry that they can’t. If neither traditional Medicare nor private insurers
can reshape physician incentives, competition between them won’t drive down costs.
Third, the pensions example may offer reason for optimism
about Medicare’s future. As Parrillo explains, the prospect of U.S. involvement
in World War I spurred Congress to refashion the pensions system to make it
“capable of saying no to service recipients in a way that acknowledged (if
crudely) rival mass claims to public resources” (p. 23). Support for veterans
hadn’t waned, but competing demands finally overcame political resistance. The
same will probably hold true for Medicare. Already, the Affordable Care Act has
encouraged the development of integrated medical systems that—partly by putting
physicians on
salary—hold promise for changing how physicians practice medicine. Those
efforts are likely to accelerate as Medicare spending continues to grow.
Putting the specifics of Medicare to one side, the broader
point is that Beyond the Profit Motive is
a vibrant demonstration of the old adage that history doesn’t repeat itself,
but it does rhyme. In rediscovering a revolution in our past, Parrillo may also
teach us something about revolutions that are to come.
Nicholas Bagley is an
Assistant Professor of Law at the University of Michigan Law School. He can be reached at nbagley@umich.edu.