Why Healthcare Costs So Much – Part 6

This article was originally published on The Well-Read Man, on August 23, 2017.

Part 6: Supply-side Healthcare Solutions

(This is Part 6 in a continuing series on the cost of healthcare in the United States. Click here to start with Part 1 or click here for the previous installment.)

In the previous article in this series on healthcare costs, we examined the role that medical insurance plays in increasing demand for medical services, since the ready money made available through insurance chases a limited supply of doctors in a way that brings inflation to medical costs. In this, the last entry in the series, we will look at some things that impact the supply side of the supply-demand equation. This is just as important as the demand aspect, since all other things being equal, cost increases can come about through increases in demand, decreases in supply, or a combination of both.

As you might expect, there are many things that can affect the supply of physicians, medicines, and medical devices within the healthcare system. Consider the role of medical licensing of physicians and other providers by each state. To obtain a license in California, for example, “applicants must have received all of their medical school education from and graduated from a medical school recognized or approved by the Medical Board of California or must meet the requirements of Business and Professions Code section 2135.7.” They must also pass the United States Medical Licensing Exam (or its equivalent), and submit proof of passage to the state. I personally think these licensing requirements for doctors are great, but if such rules did not exist, a lot more people might consider opening their own “doctor” offices. The licensing requirements acts to reduce the supply of physicians, although for a public safety rationale.

The price of malpractice insurance premiums, the high cost of a medical education, and the rigors of residency and internship also work to limit the supply of doctors, since some candidates who might have succeeded in the medical profession may decide that these obstacles are not worth the eventual benefits.

One issue that must be addressed when crafting legislation that impacts healthcare, especially one that claims to lower the cost of healthcare, is how to increase the supply of healthcare providers, since their service fees are a large part of what is included in “medical costs.” If the new law encourages more people to enter the medical profession, makes it easier for those who seek that career path to succeed, or provides incentives for existing providers to remain active, it will help to lower medical costs long term, since an increase in the supply of medical providers tends to lower costs, assuming that supply exceeds demand for services.

There were a few regulatory items in the Affordable Care Act that could have provided incentives for new and existing physicians, especially those engaged in general practice. Beginning in 2013, states were required to pay out higher fees under Medicaid to providers of family medicine, general internal medicine, or pediatric medicine services. While those adjustments are not big in the grand scheme of things, they might keep someone in the general provider pool who was considering entering a more lucrative specialty. At the state level, laws have been passed that expand opportunities for physician assistants, nurse practitioners, and medical technicians, providing ways to enlarge the total number of providers even if the total number of general practitioners does not increase.

Unfortunately, newer federal regulations like those in the ACA do little to encourage growth in the pool of healthcare providers. Instead, those laws have tended to increase the cost and regulatory obligations that physicians must meet in order to continue practicing. There are also new requirements for non-profit hospitals, and large penalties for those who fail to meet the regulatory demands. While the goal of such regulations may be to improve the level of healthcare in the country, they nonetheless have a limiting effect on the overall number of providers.

As long as the government imposes rules that limit the total supply of medical goods and services, no amount of jiggering of the insurance system will bring down healthcare costs. The only way to lower costs, no matter who is paying those costs, is to lower demand, increase supply, or both. When politicians promise to make something cheaper, but do so in a way that ignores the underlying rules of supply and demand, it imposes a type of illness on the nation that doctors and prescriptions cannot cure.

[Image Credits: Chad A. Bascom / US Navy]