Friday, June 29, 2007

Does Medical Supply Really Create its Own Demand?

Dartmouth Medical School receives over 5,000 applications for just 70 spots in its MD entering class. This is typical for medical schools across the country, and it swamps even the best business schools. That is a 1.4% acceptance rate, just amazing.

Lots of questions emerge from this, one simply being why so many students want to get an MD.

But my thoughts are more on the economics of health care. My knee jerk reaction to this unsatisfied demand is to question why medical schools don't expand and accept more students -- or why new schools don't open. I believe there are constraints put onto the expansion and opening of new schools by the American Medical Association, basically a supply restriction. My economics intuition would say that this is a monopolistic restriction that is meant to keep doctors' salaries high. Removing the restricton will get us more doctors, forcing their wages down, with the result of lower medical costs and improved patient welfare.

Not so fast, some observers say. Actually, in this market, an increase in supply will simply mean that the additional doctors will be employed, at the same wages, and therefore the medical expense bill will increase. Supply creates its own demand in this market, and the secret to keeping medical costs down is in fact to force restrictions in supply -- fewer beds in hospitals, fewer doctors, fewer exotic imaging machines.

I agree that there are problems on the demand side of this market, with insurance increasingly making patients less and less sensitive to cost.

But would expanding the supply of doctors really result in a worse situation? It should still cause doctors' wages to fall, even though the total spent might increase. This is true of any market -- the dollar size of the market after an increase in supply can rise or fall, depending upon elasticity of demand and of supply.

Is the dollar size of the market really what we care about? There is way too much focus in this country on total dollar expenditures on health care. I really find it hard to believe that the restrictions on supply of doctors is welfare-enhancing. Time to investigate the AMA.