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Supply And Demand

A little while back, Brad Plumer put on the table a proposal to reduce health care costs I hadn't heard of -- build more medical schools. Apparently there are only 125. Since I'm a dork super-cool guy, I spent Wednesday night getting some beers with a friend and talking about health care policy, and put forward the idea that we should try and import some huge quantity of Indian doctors (I have this picture of India consisting of 100 million doctors, 200 million engineers, and 800 million dirt-poor subsistence farmers; probably that's not quite right...) which is along the same lines. There is, however, something of a catch. I recall having read several times articles about the odd fact that when you do regression analysis on Medicare costs by region it turns out that supply of health care is positively correlated with per capita Medicare spending. What seems to be happening is that in areas where there's a higher ratio of doctors (or hospital beds) to patients, they take advantage of Medicare's entitlement structure to simply gin up additional business by prescribing enough treatment to use up the local health care capacity.

This would all be fine (or at least not terribly un-fine) if seniors in high-supply, high-cost areas wound up with better health outcomes, but they don't. In low-supply, low-cost areas people only get treatments they really need. High supply areas wind up making patients live slightly shorter lives. Under a properly structured system, more doctors would be very helpful. But given the system we have, more doctors are not a substitue for systemic reforms.

February 13, 2005 | Permalink


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Matt, there are only 45 million Americans who don't have health insurance today. Please stick to more pressing issues, like Social Security in the year 2042.

Posted by: poputonian | Feb 13, 2005 1:26:34 PM

Matt, I remember reading a study along those lines too, but I think the upshot was that areas with more general practitioners have lower costs and better care, while areas with more specialists have higher costs and worse care. For the reasons you mention.

Posted by: Brad Plumer | Feb 13, 2005 1:34:58 PM

The problem with regression nalayses is what we call "the identification pronlem"--are we "indentifying" a demand curve or a supply curve? The results you mentionsuggest we're "identifying" a supply curve. There are more health care services supplied in those regions beacuse demand is greater (prices and quantities are both higher). So, either the populations in those areas have greater health problems, or their non-Medicare demand for health care is greater (and that drage Medicare spending up), or...

Posted by: Donald A. Coffin | Feb 13, 2005 1:36:33 PM

More doctors cause higher prices in an area or higher prices in an area cause more doctors?

Posted by: richard | Feb 13, 2005 1:47:54 PM

You still have to address the "Northern Exposure" problem. I spend a fair amount of time in small towns in the Midwest visiting relatives, and the fact is no doctors will live there even if paid to do so. The small-town doctors have all died off, and even when a town raises the funds to import a doctor from India (which they do), he leaves as soon as he has worked off his loans.

250,000 seems to be about the smallest city that can support a self-sustaining medical community.


Posted by: Cranky Observer | Feb 13, 2005 1:50:11 PM

Does Medicare increase the supply of doctor's services by increasing payment or by decreasing payment? I'd guess the latter. Medicare reimbursement rates are lower on avergae than rates from other payors. High Medicare expenditures in an area mean lower average reimbusrement rates. In these areas, MDs find themselves less deeply embedded in the backward bending labor supply curve which sends so many of them out to the golf courses every Wednesday.

The backward bending labor supply curve also explains why "more medical schools" is a sound policy. More MDs = lower MD wages = more MD labor = less MD golf.

Posted by: ragbatz | Feb 13, 2005 1:57:10 PM

why not have more care delivered by nurse practitioners, who charge less, spend more time with patients (improving both care and patient satisfaction), and provide most of the services MDs can -- the services that turn out to be what most internists spend most all their time doing anyway.


Posted by: riffle | Feb 13, 2005 2:04:56 PM

I remember reading an article in Slate by Robert Shapiro, who worked with the Clinton administration on health care. One of the things he mentioned was focusing on the supply side, not the demand side, of health care.

It's an interesting idea. After all, if there are 1000 guys who can do something versus 250 guys who can do something, wouldn't costs decrease?

As you point out, however, there are problems with this. One is that some might try to game the system.

But what else? I have to wonder the costs of all of this. Building medical schools wouldn't exactly be cheap, to say the least. The effects of this would take years to make a difference, I imagine. Wouldn't the money be better spent on giving people health care now?

Posted by: Brian | Feb 13, 2005 2:16:13 PM

This involves several classic problems in health-care policy. One is that facilities chronically overbuild to inflate their capitalized base in the computation of reimbursement.

As for the AMA monopoly, this problem is multi-dimensional in ill-effects for the public. It would probably be fair to say that no other organization has done so much harm, and so little good, in such a short time. Most states have a "Young Doctors" rebellious faction in their state medical association, for good reason.

Suffice it to say that only massive institutions. like Medicare or the VA, can have any hope of countering the cultural and institutional power of the AMA.

And there is the simple fact that most healthcare is not delivered by doctors and doctors do not spend most of their time delivering healthcare. Doctors today are largely financial officers, deciding which techniques are billable when the test results are reviewed. For the very poor, who would otherwise be killed in short order by their serious problems, this care helps. For the well-to-do it can become a never-ending trip through a medical maze with known risks and uncertain rewards.

Posted by: serial catowner | Feb 13, 2005 2:18:03 PM

Bear in mind that the AMA uses the same rationale to control the supply of docs as sports team owners do to control the supply of players: a restricted supply is necessary to ensure quality. This argument is so compelling that Congress exempted pro sports from anti-trust laws, giving them the right to have monopolies. Is it any wonder that the cost of tickets to a ballgame, or a visit to the doc seems out of proportion to the amount of utility derived from either?

Posted by: poputonian | Feb 13, 2005 2:28:20 PM

Cranky mentions the "northern exposure" problem (I would just call it rural healthcare). What these communities need are nurse practitioners to prescribe and refer, transportation to ancillary services, and community settings that attract people out of their residences on a regular basis.

(Regularly showing up in a public setting turns out to be a key factor in assuring that you "get the word" or are sought out in some public disaster like a heat wave or epidemic.)

The doctor in a rural setting doesn't see enough patients to improve or keep their clinical skills. If you absolutely MUST have one the best kind to get would be someone ten years from retirement who wants to set down roots in a small town.

As a caregiver and patient I have dealt with reral healthcare for 8 years and it's usually not worth it. Far better to have a relationship with a clinic at a teaching hospital or specialist clinic. In my experience dealing with transportation issues is a lot better than dealing with rural healthcare mistakes.

Posted by: serial catowner | Feb 13, 2005 2:38:03 PM

It's very very expensive to become a MD. I don't have recent statistics but some years ago it was typical to go over a million dollars in debt to become an MD, and then the money has to be paid off. If you make less money you'll pay off your loans slower, and at some point you're treading water.

Given that MDs have a minimum income they have to achieve....

Well, you don't ask your barber whether you need a haircut but you do ask your MD whether you need medical care. The money spent on MDs per year is going to be proportional to the number of MDs, not counting failed MDs who have to declare bankruptcy or join the army. So if you're going to cut medical expenses, you need to do it some other way.

Posted by: J Thomas | Feb 13, 2005 3:15:44 PM

I'm all for labor mobility across borders and more competition among U.S. doctors - which even Milton Friedman says is needed in this profession. But if I were an Indian citizen, I'd be a bit concerned about "brain drain". If one measured value marginal product less in terms of dollars paid by patient and more in terms of quality of life enhanced, would not these Indian doctors be more productive over there?

Posted by: pgl | Feb 13, 2005 3:38:50 PM

J Thomas, you just made Matt's point (which is Friedman's point). Build more medical schools and the cost of getting that degree falls with the increased competition to get students to fill them.

Posted by: pgl | Feb 13, 2005 3:40:21 PM

well, they could start by allowing medicare to pay the same prices as HMOs and PPOs for equipment and such.

typicaly the Medicare payments are 20%+ higher than market prices. Here's an old GAO report.


Need more?

Do a Google search for "DMEPOS 2005 fee schedule" you can find a list of the Medicarepayment amounts for a whole host of devices. Then check froogle for some of the same equipment.

Boy, it would be nice if our Congress would find actual fixes for some of our problems instead of excuses to keep the corporate donations flowing into their re-election campaigns.

Posted by: jjj | Feb 13, 2005 3:41:52 PM

The literature you are thinking about has bee developed by a group at Dartmouth led by John Wennberg and Elliot Fisher.

You argue:

1. In low-supply, low-cost areas people only get treatments they really need.

2. High supply areas wind up making patients live slightly shorter lives.

3.Under a properly structured system, more doctors would be very helpful.

4. But given the system we have, more doctors are not a substitue for systemic reforms.

Points 2-4 are correct. Sadly, 1 is not, and to my knowledge is not claimed by the Dartmouth group. Many proposals to limit Medicare and Medicaid spending would likely make the point 1 problem worse, without addressing points 2-4.

Posted by: Bill Gardner | Feb 13, 2005 5:06:10 PM

It would be nice, too, to have some meaningful batting stats on individual doctors. How often do they misdiagnose? How often do they cure? What costs do they rack up? How many patients do they see per hour? and so on.

There are plenty of quacks out there, folks.

Posted by: yesh | Feb 13, 2005 5:38:53 PM

Well, out here in the sticks (400 square-mile area with pop about 50, 000 -- most of our doctors are from India. Our nurses are from the Phillipines. Our pharmacist is Pakistani. Our dentist is Korean.

Posted by: Tilli (Mojave Desert) | Feb 13, 2005 5:45:51 PM

pgl, I was claiming that MDs are not particularly price-competitive -- that new MDs have a minimum income they must meet. There are various ways for them to avoid price competition. One is for an increasing percentage of them to specialise. The more specialties, the more referrals, and the referrer gets a kickback. So for example when I got two of my wisdom teeth removed at age 17 one of them was badly impacted and my dentist had a specialist carve it out while he watched to pick up techniques, but he pulled the other easily himself. Decades later when I had the other two removed with no complication my dentist sent me off to a specialist by default -- he simply doesn't pull molars. For a root canal he would have sent me to another specialist, root planing likewise, and crowns. And of course the cost of simple fillings has gone up much more than the general inflation rate. The same population that used to support one dentist now has to support a dentist and 6 specialists. Prices have to go up. So do people comparison-shop to find the cheapest dentist? No, they take out dental insurance.

Now you argue that if the medical schools increased enrollment they'd have to drop tuition. Whyever would you think that? Would they cut the quality of their education just because they were churning out lots more MDs? Of course not. They would need to build lots of new buildings, and pay for them. Each med student has to buy a $3000 microscope; would the microscope prices drop because more students were buying them? Not likely. Would students look for a cheaper brand that only costs $2000? No, definitely not. If you get accepted to med school at Harvard and Howard and Howard costs half as much, will you go to Howard?

The medical industry simply isn't price sensitive. If you believe you need brain surgery, you'll go to the surgeon your doctor recommends and notice how much you trust him. You might go to a couple of others and choose the one you have the most confidence in. You definitely won't pick the lowest bidder. You need a cheap brain surgeon like you need a hole in your head.

The whole medical-care catastrophe has come because people in general want more medical care and better medical care than they're willing or able to pay for. So we've worked out scams for increasingly bigger third parties to pay for it, until the biggest of all -- the federal government -- can't do it.

"If health was a thing that money could buuuuuy....
the rich would live, and the poor would di-ieeee....
All my troubles, Lord, long time pa-assing."}

Posted by: J Thomas | Feb 13, 2005 6:39:31 PM

Are doctors trying to validate Say's Law? Did they get a research grant or something?

Posted by: bobbyp | Feb 13, 2005 9:18:31 PM

First law of healthcare policy: there are no simple fixes.

What we really need to do is restructure the way medical care is delivered in this country--most of it is very expensive crap, delivered in a way that minimizes its value and maximizes its cost. There's a lot of things that have to happen first to make that restructuring possible--realigning financial incentives, IT investment, getting a hold on the uninsured, etc.

Which is one of the 17,000 reasons this administration is so frustrating. Blaming malpractice and offering people "control" of their health are nice soundbites, but they are simply not going to do a damn thing to improve the medical system. And until we change it, we're never going to have a hold on Medicare or Medicaid. It's going to be a lot of drugdery in the policy mines, and this group simply isn't up to it. God Save us all.

Posted by: theorajones | Feb 13, 2005 10:24:37 PM

I think we will see, in my lifetime, a confirmation of my theory that it is basic human nature not to do anything about anything until we are compelled to move by crisis. That's how every positive development in the world got started. Our democracy was developed in the aftermath of a war, Social Security is a product of the depression, The health and welfare systems of Europe wouldn't exist without WWII. The American healthcare system will have to go totally crazy (It's three-fourths of the way there, now.) and only then will we install a single payer system.

Posted by: James of DC | Feb 13, 2005 11:25:08 PM

Larry Elder has been pounding away on this issue for years. The AMA is absolutely opposed to increasing the supply of doctors, for obvious reasons. But it would certainly help, that's for sure.

Posted by: Adam Herman | Feb 14, 2005 4:34:14 AM

I'm not sure exactly how it would work, but I've long thought that the way the medical industry is structured ends up forcing salaries for doctors artificially high. Why is it that tens of thousand of people are willing to get Ph.D's in sciences and liberal arts, taking 5-7 years of grad school, earning peanuts all the while, without needing to earn 6 figures at the end of it?

Given that, there's obviously a significant supply of qualified people who are willing to spend the training time in order to pursue specialized careers, without needing huge salaries at the end. So the only reason doctors need such a high salary is because med schools gouge them.

So some sort of reform of med school costs seems to be in order. Grad students usually get free tuition and even a stipend, in return for assisting with teaching duties and working in labs. Similarly, med students do internships and rotations, assisting in hospitals. Why couldn't you have a similar stipend approach there?

I don't know how much of the cost of health care goes for doctor's salaries, but I'd think that, whatever percentage does could be cut by at least 25%, of not in half, simply by reforming the medical school system. (And part of that would be removing the artificial bottleneck in the number of doctor's being trained which currently exists.

Posted by: Doug Turnbull | Feb 14, 2005 9:17:49 AM

We should bear in mind that physician services account for only about one-fourth of health care expenditures, and that percentage has been pretty steady for the past forty years. The biggest share of health care spending has always been on hospitals, and while their share has dropped over the past twenty years or so, it's now at about the same level it was at in 1960. Also note that while the number of physicians has gone up about 25% since 1990, the number of health care managers & administrators has quadrupled - there may actually be more administrators than there are physicians working in health care today.

Docs main import in controlling health care spending isn't the demand that they create for their own services, but that they're the gatekeepers to all of the expensive high-tech treatments & prescription drugs. I don't know what the best, most human way is to get them to perform that role more economically - or if that's just what they're working toward and the "right" level of health care spending is actually somewhere north of what we're spending now - but that should be the focus, not the supply of docs per se.

And as others have written, the first step is getting everybody in to the system. Cover the uninsured; make sure everybody's paying something; go after some of the lower-hanging fruit like more efficient billing practices, reducing medical errors, improving telemedicine & electronic patient records, etc.; then you'll have the information & leverage to start making some better society-wide decisions about how to allocate medical care. The current system of illusory choices & rampant cost-shifting is the first & biggest impediment to getting health care spending under control.

Posted by: Tom | Feb 14, 2005 11:48:40 AM

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