18 Nov 2009

Wishes Aren’t Doctors

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Megan McArdle reads the Centers for Medicare and Medicaid Services (CMS) report on ObamaCare and finds that the prognosis is bad. Democrats can’t simply legislate more health care loaves and fishes miraculously into existence.

(T)he most worrying item is tucked into the CMS’s “caveats and limitations of estimates” section, which is well worth reading. They point out that they, like most other agencies, are assuming a sort of frictionless universe in which 34 million new people demanding more health services increases the supply of health services in order to meet that demand. That is not, notes the CMS, a very realistic assumption:

    In estimating the financial impacts of H.R. 3962, we assumed that the increased demand for health care services could be met without market disruptions. In practice, supply constraints might interfere with providing the services desired by the additional 34 million insured persons. Price reactions–that is, providers successfully negotiating higher fees in response to the greater demand–could result in higher total expenditures or in some of this demand being unsatisfied. Alternatively, providers might tend to accept more patients who have private insurance (with relatively attractive payment rates) and fewer Medicaid patients, exacerbating existing access problems for the latter group. Either outcome (or a combination of both) should be considered plausible and even probable.

    The latter possibility is especially likely in the case of the higher volume of Medicaid services. Despite a provision to increase payment rates for primary care to Medicare levels, most Medicaid payments would still be well below average. Therefore, it is reasonable to expect that a significant portion of the increased demand for Medicaid would not be realized.

    We have not attempted to model that impact or other plausible supply and price effects, such as supplier entry and exit or cost-shifting towards private payers. A specific estimate of these potential outcomes is impracticable at this time, given the uncertainty associated with both the magnitude of these effects and the interrelationships among these market dynamics. We may incorporate such factors in future estimates, should we determine that they can be estimated with a reasonable degree of confidence. For now, we believe that consideration should be given to the potential consequences of a significant increase in demand for health care meeting a relatively fixed supply of health care providers and services.

In other words, while we are nominally increasing the number of “the insured”, it’s not clear we’re increasing their access to health care very much. The supply of health care services is actually pretty inelastic, because it depends on relatively scarce labor. There’s already a nursing shortage, and doctors already don’t want to become GPs because the pay is mediocre, the work is routine, and the hours aren’t particularly compelling. To some extent they can be replaced by nurse practitioners–but they are neither particularly cheap, nor in endless supply. And there’s a limit to how much of our health care costs we can fix by replacing current workers with less skilled labor.

When you increase the demand for something without increasing the supply, you either get price increases, or shortages. Neither is what the authors are promising for their bills.

(Yes, yes, I know what you’re about to say . . . end the AMA cartel’s artificial restrictions on entry into the medical profession! That’s a different post, but here’s the short version: the constraint on the supply of doctors isn’t the medical school slots, but the residency slots. And we’re already importing a substantial number of doctors to fill our family practice slots, because about a third of them go unfilled during the “match”. This does not suggest that there are hordes of eager potential doctors clamoring for a crack at family practice. There’s a lot of demand for specialist slots. But creating more cardiac surgeons will not put much downward pressure on health care costs.)

But this is not an indictment of the bill’s ability to control costs, as of the ability of any bill to control costs. Controlling costs means consuming less health care. There is no magic pot of money waiting to be painlessly seized from some undeserving wretch, preferably one that voters already hate. The only way we are going to cut costs is by cutting someone’s benefits.

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Norris Hall

For the past quarter-century, the American Medical Association and other industry groups have predicted a glut of doctors and worked to limit the number of new physicians. In 1994, the Journal of the American Medical Association predicted a surplus of 165,000 doctors by 2000.

“It didn’t happen,” says Harvard University medical professor David Blumenthal, author of a New England Journal of Medicinearticle on the doctor supply. “Physicians aren’t driving taxis. In fact, we’re all gainfully employed, earning good incomes, and new physicians are getting two, three or four job offers.”

http://www.usatoday.com/news/health/2005-03-02-doctor-shortage_x.htm

In his classic book Capitalism and Freedom, Milton Friedman describes the American Medical Association (AMA) as the “strongest trade union in the United States” and documents the ways in which the AMA vigorously restricts competition. The Council on Medical Education and Hospitals of the AMA approves both medical schools and hospitals. By restricting the number of approved medical schools and the number of applicants to those schools, the AMA limits the supply of physicians. In the same way that OPEC was able to quadruple the price of oil in the 1970s by restricting output, the AMA has increased their fees by restricting the supply of physicians.

http://wallstreetpit.com/5769-the-medical-cartel-why-are-md-salaries-so-high



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