Healthcare Reform on the Supply Side

Since the beginning of the Great Healthcare Debate of 2009 and 2010 just over a year ago, I’ve felt that Democrats and Republicans have both been missing a very important point. Mr. Obama and the members of his party in Congress have offered proposals aimed at dramatically expanding access to health insurance and offering coverage to tens of millions of the uninsured. Republicans counter that such plans will only worsen the problem of rampant medical inflation as price signals are further distorted in the market for healthcare and more people demand services that are already scarce. Their counterproposals, a number of which have been adopted in one form or another into the legislation that will presumably be reconsidered sometime soon, have mostly consisted of attempts to rein in costs through a combination of malpractice reform, decreased regulation of insurers, and incentives for people to save for their own healthcare expenses, thereby discouraging unnecessary spending by making consumers more aware of the true cost of their own decisions.

But both of these approaches only deal with half of the problem. Just as the Federal Reserve found itself trying to fight a supply-side problem with demand-side weapons during the era of stagflation in the 1970’s and 1980’s, Congress today finds itself attempting to resolve the healthcare issue halfway, by making changes that will only affect the nature of demand for healthcare and not its supply. It’s probably true that efforts to expand coverage will lead to more people wanting more services, but the critics offer no workable alternative.

Unlike most markets, where sustained increases in demand lead to more sellers supplying consumers with what they want, the market for healthcare is fundamentally unable to expand in such a way. Drug companies can produce more drugs, device makers can make more devices, but the amount of healthcare that can be supplied at any given time is still constrained by the number of doctors, and the number of doctors is constrained by the number of medical schools.

There’s no question that more and more people are trying to get into medical school, but getting in is becoming increasingly difficult, even for qualified candidates. President Obama has actually discussed the idea of offering better funding for medical students so that they aren’t rewarded for their toils with crushing debt upon graduation, but this doesn’t really address the root of the problem. So what if more people can pay for medical school? What if there aren’t enough medical schools?

Fortunately, the tide may be turning. An article published early last week in the New York Times discusses the fact that new medical schools all over the country are beginning the process of accreditation. It notes that there are currently 131 schools in the United States, and that only one new one opened during the 1980’s and 1990’s. In contrast, there are around two dozen that are currently close to opening, such as those affiliated with Quinnipiac and Hofstra Universities.

The article takes the contrarian view that this might not actually be as good a thing as it sounds. Not only will we not see a dramatic increase in the number of physicians anytime soon, but there is no guarantee that these doctors will end up in the rural and impoverished areas where they are so desperately needed, or that they won’t just create demand for their own services, thereby worsening the problem of access.

But in economics, there’s no such thing as a free lunch, and I for one would much rather pay for my lunch than go hungry. The system by which healthcare is provided and paid for in the United States is highly dysfunctional, but there is a limit to what demand management policies can accomplish. Without more doctors and nurses, our quandary will only get worse.