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.


Anonymous said...


Your comments on AMA are right on. We can go back to "Free to choose" by Milton Friedman and his very thoughtful comments on the impact of unions. The AMA absolutely increases the cost of healthcare.

The difficulty, though, with healthcare is that it is a good that people believe they are entitled to no matter what the cost, especially if the cost can be passed on to society in one form or another. When that is the case, it is difficult to make it work well. The system though has tremendous process inefficiencies that can be improved and ultimatley reduce the cost rather significantly. However, how does one resolve a situation where new procedures, equipment, or medicine that are very costly have a low probability of saving someone's life. Any parent would want that procedure for their child, irrespective of the economics.

Healthcare in my view is the most difficult issue to resolve from economic point of view.

By AK, Ex-student and friend.

Anonymous said...

Prof. Hansen,

You are right on some points, but there is something more complex going on below the surface. Doctors are not fungible goods, different types of doctors earn different income based on their specialty/discipline.

So, although you may be right that certain specialties have a supply/demand imbalance, it is dubious to say that the entire system is artificially constrained.

Secondly, you argue that a shortage in doctors increases healthcare costs. The reality is that the CMS (Center for Medicare & MedicAID Services) sets the reimbursements rates which then propogate through the entire system... it is those reimbursement rates that influence the rationalization process to begin.

When stenting procedures became popular, they had a very high reimbursement rate, and the interventional radiologists who implanted them became big earners, and big revenue generators for hospitals. There are now many medical students that want to move into this specialty.

There have been instances (ask Dr. Conway) when these doctors had idle time, and ended up implanting stents into patients that did not need them, simply for the extra money. Clearly, the supply of doctors was more than adequate and yet the costs did not decrease, they actually rose albeit because of ethical lapses.

So, I ask you, if the AMA was behaving in the best interest of ALL doctors, why do some specialties earn $300K+ per year while others earn barely $80K (pediatricians for instance)? If the AMA was interested in lining doctors' pockets, they would find a more equitable way to spread the money.

Further, unlike an MBA or a JD, MDs literally have peoples' lives in their hands. Allowing everyone who wanted to, to become a doctor could lead to a lack of quality in the healthcare system. There has to be some gating mechanism.

Additionally, you overlook a reality of the medical school application process. It is not uncommon for applicants to apply to 20 or more schools, (one of my friends applied to 32 schools). The real question you want to be asking is, "of all the people who apply to medical schools, how many are rejected from every school they apply to?"

That number represents your untapped supply of doctors, not the 98% you allude to.

The one area where I do have issues is the attrition from the medical field. I personally know 3 individuals who went to medical school and do not practice medicine. They left the field for more glamorous jobs in venture capital and law. I do believe that if you take a spot in a medical school class, you should provide medical services for a compulsory 5 year period. (and since you can't force people to do something, you can legally prohibit companies from hiring MDs that have not completed their 5 year service)

By leaving the medical profession, you “wasted” the spot that could have belonged to someone else that wanted to practice medicine and help people, not just sell out and use your degree to make more money.

That is where Med School differs from other professional schools that are used as springboards to a career. Medical school should include an obligation to practice medicine.

Matt T'08

Daver said...

I wouldn't be surprised medical supply did create its own demand. For example, what if bulb syringes supplies need to be replenished from overuse? I'm sure that happens depending on how many people come into a hospital.

Anonymous said...

All I know, is that i do not even bother going through my insurance for medical supplies because it is a pain in the neck. I buy from a site called they help me a lot with my needs.

Medical Supply said...

amazing, yes, medical supply really create its own demand........!!!!!