Doctor shortages and health-care price controls

Last September, Paul Howard reported in in City Journal of "a 2006 survey finding that as many as half of all physicians have either stopped accepting new Medicaid patients or limited the number they’ll see because reimbursements are so low."

And today Investor's Business Daily reports the results of a new survey of physicians: "45% Of Doctors Would Consider Quitting If Congress Passes Health Care Overhaul."

The reason for both these phenomena - one actual, one potential - is the direct result of price control.

The fundamental rule of economics is that someone is able to buy only if someone else is both able and willing to well. This is true no matter what kind of economic system is at work, from command-economy totalitarianism such as the old Soviet Union's or to a full free-market economy such as America's used to be.

However one might describe the economic system of American health care, "full free market" ain't it. Probably the best description of how we get medical care is that it is brokered to us: "Health care does not equal health insurance."

The costliness of health care rests largely on the fact that its provision became brokered long ago by insurance companies. We buy "coverage" from insurance companies instead of medical care from providers. The insurance company is intermediate between the consumer and the provider. Unlike say, stock brokerages, which have to compete with each other for consumers and so lower both costs and price, health insurance companies operate in monopolistic fashion. The competition between health-insurance companies is so low that there are no competitive pressures to reduce price, only internal costs. The result? Lower reimbursements to providers and higher premiums to consumers.

We have almost a doubling effect of price controls in play here. First, the government, command rations medical care by controlling the prices its insurance programs will pay, especially Medicaid but also Medicare. Then we have health-insurance companies effectively price controlling medical care because they often, if not usually, tell doctors that they won't pay more (or much more) than the Medicare rate. As Healthsymphony.com puts it, Medicare is such an important part of the health-care economy "because of the precedence set by its claims payment practices."

The inevitable result of price controls, no matter by what mechanism implemented, is shortage of the price-controlled good or service. That doesn't mean that the service is scarcer, that is, physically rarer. Medicaid's low payments schedules have not reduced the total number of doctors. It has produced a shortage of medical care available to patients by halving the number of doctors who will accept Medicaid payments.

The distinction between scarcity and shortage is crucial to think through reforming health care. Presently, we have shortages of care (not uniform shortages across the country or across all medical disciplines) because of:

• price controls by Medicare and Medicaid and
• second-level price controls by health-insurance companies that follows the precedence set by Medicare.

Shortages are phenomena of prices. When prices paid by consumers (and insurance programs are the actual consumers in America, not you and me) are not synchronized with costs of providers, then you get things like a shortage of Medicaid-providing doctors even though there is no scarcity of doctors.

Well, there may be no supply-scarcity doctors who could treat Medicaid patients but that doesn't mean that there's not an overall scarcity of doctors. The NYT's John Tierney reports,

The A.M.A. may be one of the most trusted voices by the public in the health-care debate, but some economists argue that it helps perpetuates one of the largest problems with the American system: a cartel that limits the number of doctors. Mark J. Perry, an economist at the University of Michigan, argues that “we would probably go a long way to solving our ‘health care crisis’” if the “medical cartel” hadn’t prevented medical schools from expanding to meet students’ demands for more places. ... whereas medical schools shrunk instead. As a result, their rejection rates rose, frustrating students who wanted to be doctors. The result was fewer doctors to care for the growing population... .

Ms. [Shikha] Dalmia, a senior analyst at the libertarian Reason Foundation, says “that the net effect of A.M.A.-type restrictions hasn’t been to make better quality doctors available to more people, but to reduce existing options, especially in rural and other under-served areas.” She concludes: 

Obama and his fellow Democrats blame the current health care mess on the free market. But a free market can’t exist when a cartel with the ear of the government is allowed to control a key input for its own self-aggrandizement. If the president is serious about lowering health care costs instead of advancing an ideologically driven government takeover of the industry, he should be doing everything in his power to disband it–not cozy up to it.

The link to Ms. Dalmi's article is here.

So on the one hand we have price controls mandated by the government. Price controls always create shortages even if there is no actual scarcity of supply. But on the other hand we have an actual supply scarcity of medical-care providers (see Ms. Dalmia's article for more). 

What is the effect? MSNBC tells it straight:

As Massachusetts' experience shows, extending health care to 50 million uninsured Americans will only further stress the system and could force many of those newly insured back into costly emergency rooms for routine care if they can't find a primary care doctor, health care observers said.

Massachusetts, home of the nation's most ambitious health care law, has seen the need for primary care doctors shoot up with the addition of 428,000 people to the ranks of the insured under a 2006 law that mandates health care for nearly all residents.

To keep up with the demand for primary care doctors, the country will need to add another 40,000 to the existing 100,000 doctors over the next decade or face a soaring backlog, according to Dr. Ted Epperly, president of the Kansas-based American Academy of Family Physicians.

"It's like giving everyone free bus passes, but there are only two buses," he said.

The need for more primary care doctors comes as the country's shortage of all doctors is expected to worsen, according to a study by the Association of American Medical Colleges, which found the rate of first-year enrollees in U.S. medical schools has declined steadily since 1980.

If current patterns persist, the study shows the country will have about 159,000 fewer doctors than it needs by 2025.

That last prediction should have read, "the country will have about 159,000 fewer doctors than it needs by 2025 unless adjustments are made to the way that doctors are paid." The presumed supply scarcity of physicians does not have to occur. It is not inevitable.

But that's not all - we also have a supply scarcity of private health-insurance companies, even though there are more than 1,000 such companies operating in the country today. The reason is that health-insurance companies are restricted from operating across state lines. So there is a supply scarcity of insurance put into effect by law. 

The upshot of this hodgepodge is:

• patients are not the real medical-care consumers, insurance companies are.
• market corrections relative to supply, demand, price and costs simply do not occur. Instead, we have rationing by government price mandates, amplified by private insurors.
• Non-competition by insurance companies for premium-paying patients means that patients are basically  caught in monopoly markets and have no recourse to rising premiums except to pay them or reduce coverage.
• Supply scarcity means that doctors don't compete, either. Instead patients have reduced choices of doctors except in a small number of locations. The number one question patients have to ask before selecting a doctor is neither how good the doctor is nor what are his prices, but whether s/he accepts the patient's insurance plan.
• Supply scarcity also means that patients pay non-financial prices for medical care. Stories are legion of lengthy waiting times in doctors' offices for scheduled appointments and long waiting time to get an appointment in the first place. (For some reason, though, I rarely have waited more than 15 minutes past my appointment time to see my own doctor. Seems to be a very competently-run office.)

So, a thought experiment - suppose these things all happened reasonably close together (ain't gonna happen, that's why it's a thought experiment rather than a proposal):

1. Insurance companies could compete across state lines. Remember what Karl Marx (no friend of free-market capitalism he) said, that when greater competition becomes possible, it quickly becomes necessary.
2. Medicare lifted payment limits to doctors, but with these provisions: First, doctors must post in their offices their price schedules for the medical services they provide. Second, patient co-pays cannot be waived by the doctors.

I am not an economist, but my understanding of the dismal science makes me conclude that the first option would result in greater coverage choices of insurance by consumers at lower costs. The second would buttress patients, not insurance companies, as consumers and result in a leveling of price, demand and costs. Doctors would have to answer first to patients for prices rather than simply accept whatever payment schedule the insurance companies laid down. This would be even stronger if medical savings accounts programs were expanded so that all Americans could take advantage of them.

As for the supply of medical-care providers (who might not necessarily be actual M.D.s) I think that these two influences would cause the supply to be increased.

Update: See also, "Understanding the Causes of Health care Inflation."