When Demand Outpaces Supply

Anyone who has taken an introductory economics course has learned that all else equal, it is preferable to have an economy in equilibrium. What this means is simply that we arrive at the best outcome when demand for a particular good equals the supply of that particular good.

Healthcare, in and of itself, is no different than any other good. There are suppliers (doctors) and consumers (patients). When the total supply of healthcare available is able to meet the total demand, everyone benefits - patients are able to receive the care they need for a given price, while doctors are available to provide the care that patients demand, at the price determined by the market.

Let's say for a moment, that all else held equal, the amount of money that doctors are paid for one set of patients is reduced to between 70 and 80 percent of what another set of patients pays. One of several things can happen - doctors can pass on the difference in costs to other patients, doctors can stop seeing the patients that pay less, or doctors can be forced to accept the costs. None of those situations is good for either patients or doctors. Inevitably, the result will be higher costs for some patients who subsidize others, greater access problems for patients who pay less, fewer doctors available in general (those who can't meet their variable costs will be driven out of business, and potential new doctors may be deterred by the higher barriers to entry), or some combination of the three.

Sound familiar? It should. This is the reality of the American healthcare system.

And the Affordable Care Act (ACA) only makes it worse. Here's why.


Note: The chart above is log-scaled for ease of comparison of the two datasets

Most projections estimate that the number of Americans without health insurance will fall from around 15 percent now to about 7 percent by 2020 (these are fairly optimistic estimates as they assume that all states undergo the Medicaid expansion) - a drop of nearly 50 percent.  The Bureau of Labor Statistics (BLS), however, estimates that there will be a corresponding increase in physicians of only about 24 percent by 2020. What this means, is that there will be greater healthcare utilization (more people have health insurance and thus will use health services more often), while the number of physicians as a percentage of the population stays relatively static. In other words, the big ugly monster known as a "physician shortage" will rear its ugly head.

Even left-of-center economists, like Brad DeLong of UC Berkeley, have noted the impending shortage.

A shortage of this magnitude will likely lead to fewer doctors accepting Medicare and Medicaid (which pay much less than private insurance), while others may simply forgo accepting insurance altogether. Alternatively, healthcare rationing may take hold, in which case Americans will have to wait significantly longerfor primary care appointments, surgeries and other medical procedures.

The root of the problem lies in the lack of true pricing in the American healthcare system, and fragmented insurance programs with varying reimbursement schemes. The ACA does very little (for two years, Medicaid rates rise to Medicare levels for primary care providers) to address this, and by throwing more people into the broken system we have now, it simply reinforces the status quo.

For an example of how the ACA could be remedied, see Avik Roy's post at the Apothecary, which lays out a path towards a market-based system with more price transparency and greater consumer choice. In addition, domestic regulations and requirements for physicians' educations should be reduced, which would make it more attractive for individuals to pursue a medical education and further help limit the physician shortage. (See my previous post on why physician pay is so high in the U.S.)

A final bit of irony: if the ACA's coverage expansion doesn't work out the way its proponents hope, we may very well avoid the looming physician shortage but we're no better off than where we started. Yet, if it does work out, we've made it that much more difficult to truly reform America's fragmented healthcare system. 

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