The Law of Supply and Demand

We’ve all heard the phrase before.  When things are in short supply, people are willing to pay more for what you have to sell.  And when things are plentiful, just the opposite: the thing you want to sell, whether it is a product or service, decreases in value.  For example, when people panicked about the availability of toilet paper last year, manufacturers raised prices (even though they were manufacturing toilet paper in the same quantities as before the virus).  The same thing should hold true for doctors; the more there are of them, the less it should cost to go to the doctor.  If that is true, it would certainly help to lower the cost of health care in the U.S.  If it’s true.

According to Statista, the number of physicians in the U.S. has increased each year, from 720,325 in 1995 to 1,085,783 in 2015.[1]  And, the number of doctors in active practice has, like the total number, also increased each year.  According to data from the Federation of State Medical Boards, in 2016 there were 953,695 actively licensed physicians serving a national population of 323 million people:

“This represents a net physician-increase of 12% from the 2010 census.  From 2010 to 2016, the actively licensed U.S. physician-to-population ratio increased from 277 physicians per 100,000-population to 295 physicians per 100,000-population.  Females now make up one-third of all licensed physicians, with osteopathic physicians and Caribbean medical graduates continuing to demonstrate substantial increases in both their absolute numbers and as a percentage of all actively licensed physicians from the 2010 to 2016 time period.”[2]

This data indicates that the number of doctors available to provide services (the number per 100,000 people) is increasing thus assuring that health care is accessible.  And, thanks to Obamacare, this has occurred even as the number of people with health insurance has increased, such as through the health insurance exchanges and Medicaid expansion.  Nonetheless, accessibility depends on other factors, such as the number of physicians in a particular specialty (brain surgeons are rarer than primary care physicians) or their location (if you live in a rural part of the country, there may not be a doctor available within an hour’s drive).  And here is where things get even more complicated as the cost of health care is not strictly dependent on the supply of medical providers, i.e., the notion that the more doctors we have, the less that health care will cost is not true.

Health care costs reflect multiple factors, some within the control of the health care system, and some are external forces which the health care system has little to no control over.  Donald Trump once said, “Who knew health care was so complicated.”  I knew and that is why three chapters in my book describe the many things that affect the cost of health care.  For example, when it comes to physicians, it isn’t just the number that influences costs.  Doctors are highly educated professionals whose years of training and preparation help determine their salaries.  Many are in specialties, such as surgery, cardiology, oncology, and emergency medicine, where life and death decisions are made, and thus have salaries commensurate with those responsibilities.  Physicians also have the burden of malpractice insurance, costs which are passed onto customers as higher fees.  Consequently, when it comes to health care costs it isn’t just a numbers game where having more doctors results in lower costs.

So far, I have used doctors as an example of why the law of supply and demand does not work as you would expect in the realm of health care.  However, there are many other examples, such as  health insurance which is responsible for a large portion of health care costs.  For example, the number of people in a health insurance risk pool is an important factor in determining the cost of health insurance premiums.  The more people in the insurance risk pool the more likely that the majority will be healthy most of the time and that a minority will be ill for short periods of time.  Thus revenues should exceed expenditures making it possible to cover the costs of those in need of care, keep premiums low, and provide enough for owners and investors to make a profit.  At least that is the way it’s supposed to work.

However, as with the medical workforce, it’s more complicated.  First, there is no guarantee the majority of members in the insurance risk pool will be healthy.  This is particularly problematic in the United States where a third of Americans are overweight and another third are clinically obese; conditions that lead to onset of a multitude of health problems including diabetes, cardiovascular disease, and cancer.  Throw in such things as lifestyle choices – Americans have high rates of drug use and high injury rates – and you can see that an insurance risk pool is influenced by more than just the number of people in the pool.     

Second, conditions beyond the control of the insurance industry impact on their costs, such as costs associated with medical technology and pharmaceuticals.  For example, without government intervention, the private health insurance industry has had difficulty negotiating  drug costs; they may or may not be able to negotiate a discount.  Either way, those costs are passed onto consumers in the form of higher insurance premiums and deductibles.

And, because they are for-profit entities, health insurance companies are driven to take in more than they expend.  To do that, they will raise premium rates, raise deductibles, and deny treatment to the extent possible.  Health insurance executives who succeed in generating large profits for their stockholders are rewarded with high salaries and benefits, which provides an incentive to continue to raise revenues and deny claims.  This is one reason why the cost of a health insurance premium has risen every year for more than twenty years straight.  A reminder that competition, the bedrock of Republican economics, does not work when it comes to health care.

For twenty five years I taught a course on economics and finance in health care administration at a local university.  My first lesson was on why health care economics does not always follow the law of supply and demand.  For example, because it is such a complex system, market-based activities such as supply side economics (i.e. reducing regulations) and competition don’t work as we would predict.  In fact, reducing regulations might result in higher costs due to the potential of harm to patients when guidelines are not adhered to.

Instead, we need to understand the multiple factors that influence health care costs and promote activities that can improve clinical outcomes, enhance efficiency, and better manage costs.  For example, focusing on health prevention could result in lower costs, by encouraging and rewarding healthy lifestyles.  And medical research should produce savings by finding cures for debilitating, life threatening diseases.[3]  These issues, along with the recognition that traditional economic models do not always apply to health care delivery, are what ultimately sold me on the idea of a national health program, with the goal of working toward greater efficiency and effectiveness.


[1] https://www.statista.com/topics/1244/physicians/

[2] https://www.fsmb.org/siteassets/advocacy/publications/2016census.pdf

[3] Gene therapy (fixing the position of a gene) holds much promise for such diseases as cancer, cystic fibrosis, diabetes, single cell anemia, Huntington’s disease, Parkinson’s disease, and hemophilia.  Although the initial cost to treat these diseases, based on current techniques is quite expensive, they are chronic illnesses that cost much more to treat if not cured.

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