Health Economics: Fixing Our Ailing System
Application of the basic supply and demand curves can often shed light on market dynamics. Although the graph below is simplistic, it will help make some basic points.
The Demand line shows that as price decreases more people buy so the quantity purchased increases. The Supply line shows that as price increases the quantity supplied increases. Where the two lines cross is the equilibrium price.
If there is high demand for something and the supply is restricted, suppliers will hold out for a higher price. Price increases. As price increases, more people will be attracted to be suppliers and supply will increase. As supply increases the demand is filled and supply will exceed demand. Buyers will begin to shop around. Suppliers are then forced to lower price to increase demand. The back and forth oscillation between supply and demand would be the natural expectation in a free market.
If supply is artificially constrained, we would expect price to be higher than equilibrium. If demand is artificially stimulated, we would expect price to be higher than equilibrium.
What happened to health care?
The Flexner Report in 1910 criticized the state of medical training. The German allopathic curriculum was advocated as the standard. Only those schools who adopted the new standard were given research funds. State licensing boards would only license doctors that graduated from the standardized schools. Through research funding, standardizing medical school curriculum, and state licensing boards supply has been limited. Due to government regulation and funding, supply has been constrained with an upward affect on prices.
Insurance has made health care more affordable for more people. Due to insurance coverage, demand for health care has risen. As explained earlier, as demand increases, price goes up.
Insurance companies have attempted to restrict the amounts that they pay out. They require more documentation from the providers to prove medical necessity. Doctors have to hire more staff to handle the paperwork. Doctors also have to perform more procedures to prove medical necessity. That drives up the cost of providing health care.
In addition, with a large pool of insurance dollars, many companies have been encouraged to develop innovative technologies and medicines to treat disease. They expect a large return on their investment. That has also driven up the cost of care.
In order to fix health care we either have to play by the rules of supply and demand, or socialize the system. We are already well down the road of socialized medicine. I doubt that there is any turning back.