As the Supply Curve Shifts…

Today's New York Times runs an oped on the supply of physicians by David C. Goodman, an investigator with the Dartmouth Atlas of Health Care. The Dartmouth Atlas does invaluable work documenting the waste that exists in Medicare and other parts of the U.S. health care sector. Goodman critiques a recommendation by the Association of American Medical Colleges that the United States increase its output of doctors by 30 percent to meet the needs of the growing number of elderly Americans. That critique is excellent as far as it goes, but it seems to miss half the picture.

Goodman argues that increasing the number of physicians will do nothing to improve the quality of health care. He cites the sort of data for which the Dartmouth Atlas is famous:

Many studies have demonstrated that quality of care does not rise along with the number of doctors. Compare Miami and Minneapolis, for example. Miami has 40 percent more doctors per capita than Minneapolis has, and 50 percent more specialists...

The elderly in Miami are subjected to more medical interventions — more echocardiograms and mechanical ventilation in their last six months of life, for example — than elderly patients in Minneapolis are. This also means more hospitalizations, more days in intensive care units, more visits to specialists and more diagnostic tests for the elderly in Miami. It certainly leads to many more doctors employed in Florida. But does this expensive additional medical activity benefit patients?

Apparently not. The elderly in places like Miami do not live longer than those in cities like Minneapolis. According to the Medicare Current Beneficiary Survey, which polls some 12,000 elderly Americans about their health care three times a year, residents of regions with relatively large numbers of doctors are no more satisfied with their care than the elderly who live in places with fewer doctors. And various studies have demonstrated that the essential quality of care in places like Miami — whether you are talking about the treatment of colon cancer, heart attacks or any other specific ailment — is no higher than in cities like Minneapolis.

In other words, doctors in some areas of the country order up a lot of health care that seems to benefit no one but the doctors themselves. All that apparently value-less health care costs workers and taxpayers tens of billions of dollars per year.

But Goodman does not address an equally important question: whether an increase in physician supply could make health care more affordable. In the standard supply and demand model, loosening a constraint on supply shifts the supply curve to the right, which reduces prices. With third-party payers, the process gets pretty attenuated -- probably more so when the government is paying than when a private insurer is paying. But that's not the same thing as saying it breaks down. In fact, it's hard to believe that increasing the supply of anything by 30 percent over time wouldn't have an effect on prices.

Goodman might have noted that (1) the persistence of expensive, low-quality care and (2) a relatively unresponsive price mechanism are both enabled by the same same feature of the America's health care sector: our over-reliance on third-party payment. As Mike Tanner and I noted in Healthy Competition, we even nose out Canada in terms of the share of medical care purchased by third parties.

Fixing that problem could address both cost and quality problems. Miami patients would be less likely to let their doctors order up useless tests if those patients are paying, say, 5 percent or 10 percent of the cost. And price is much more likely to respond to supply shifts if you have 200 million price-sensitive purchasers as opposed to a few hundred third-party payers, not all of which are price-sensitive.

Goodman's Dartmouth colleague John Wennberg has recommended using medical savings accounts to cut out some of the waste in Medicare. Here's an idea for getting rid of even more useless medical care: just give Medicare beneficiaries a lump-sum payment, adjusted for their individual health risk, and let them purchase medical care and coverage until it stops providing them value.

That might even change the political dynamics enough that we could eventually put to bed these wasteful political discussions about whether we should allow 30 percent more people to become doctors each year.