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Tuesday
Mar222011

Why Supply & Demand Doesn't Apply To Primary Care Medicine

One of the most fundamental tenets of economics is the law of supply and demand. 

I love it myself because it’s pretty darn simple, and makes sense to just about everyone…that is, if “everyone” doesn’t include the healthcare industry.

At the most basic level, you’ve got two components: supply and demand.  There is an inverse relationship between the two, so independent of external factors, when one goes up the other goes down, and vice versa.  This allows business owners who have properly positioned themselves in high demand industries or niches to reap the benefits of increased demand for their products or services.  The benefits usually come in the form of increased profits, and one must look no further than the oil industry for an example.

As the [perceived] supply of oil drops, demand increases, and with it – prices.  This is where the free market brings equilibrium into the equation, because as prices increase in response to rising demand, the demand will eventually taper off as consumers find substitutes or decide to live with less of the products and services they’re buying.  With oil it’s slightly tricky as not only do we all need it – we have a hard time living without it.  Whether we’re driving to work, flying across the country, or buying groceries, oil is responsible for most aspects of our lives, and therefore remains in high demand – kind of like healthcare.

So, using oil as an example of how rising demand due to decreased [perceived] supply works, one might assume that this would apply to other important areas of our lives such as retail, commodities, manufacturing, and healthcare.  The answer to this is, true, true, true, and…you guessed it – false.  The same doesn’t actually apply to healthcare, at least not primary care – and this is why.

Our system of reimbursement in healthcare is such that we pay for procedures, not “brain time.”  Sure, we want the smartest doctors, brilliant physical therapists, and the best dentists…there’s no argument there.   We just don’t want to pay for the thought processing.  We want to pay for procedures, much like we’ll pay an auto mechanic to “fix” our car – not to tell us what’s wrong with it.  So, what happens is we have patients who demand primary care services, but it’s not really their voice that matters.  If it’s not demanded by the payers, and isn’t associated with a corresponding increase in price for services (which ties directly to physician wages), we don’t really have a working supply and demand relationship that results in pricing and supply equilibrium in the healthcare marketplace.

Interestingly, supply and demand works pretty well on the provider side of the equation, where the price for services is a clear driver of doctor supply.   Doctors entering medical school today see what’s going on in the industry bright as day and they realize that if they aren’t going to get paid adequately in primary care (i.e., increased price doesn’t provide incentives to meet the growing demand) they will shift away from the specialty, hence further decreasing the supply.  This is, in part, the reason for the burgeoning of mid-level providers such as family nurse practitioners (FNP’s) and physician assistants (PA’s) throughout private practices and retail health cinics.

On the patient side, where the care is being demanded, it would be great if rational economic forces existed to drive up the price for healthcare services in the primary care specialty (hence, bringing supply and demand back into equilibrium), but this doesn’t happen because the patient and they payer aren’t one in the same.

Looking closely at our 3rd party payment system it is quite clear that we’re in this situation because we’ve created it by destroying the laws of economics as relates to the primary care specialty, creating an absence of incentives to enter the profession.  With a lack of adequate incentives in the educational system to encourage primary care physicians to enter the profession by forgiving loans, and without providing substantial subsidies for those starting primary care practices in underserved areas, we are left with a growing shortage of physicians willing to staff the entry point of our healthcare system, the primary care practice.

The University of Missouri recently released a study indicating that the United States could face a shortage of 44,000 primary care physicians by the year 2025 if incentives are not put in place to bring equilibrium back into the healthcare system.  So, it looks like we either create a system that is funded well enough to pay for all healthcare services for everyone (and figure out a way to keep providers incentivized to work hard, innovate, and progress – and also figure out how to prevent overutilization by patients), or we stop considering “business” and “economics” dirty words in the healthcare industry and allow physicians, physical therapists, dentists, and optometrists to enjoy the benefits of entrepreneurship, competition and free market incentives.

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