4.29.2009

Paging Dr. Shortage

"Where have all the doctors gone?" asks Juliet Lapidos at Slate.com. She notes that "Obama-administration officials have reportedly become alarmed by doctor shortages" and then goes about explaining why, in her mind, there is a looming shortage of primary care doctors.

Her answer? Baby boomer doctors are retiring, and baby boomer consumers (say that 5 times, quickly) are getting old and increasing demand.

While she is right that the baby boomer generation has certain impacts on the overall health care picture, she doesn't adequately address why there has been such a drop in medical students planning on going into primary care. She also seems to assume, incorrectly, that while there is increasing demand, the declining number of doctors entering primary care is the fundamental cause of the shortage. On a free market, doctors would go where the demand was, but while demand for the service is in fact increasing, the producers (doctors) are not increasing supply. Why not?

In her opening paragraph which I already partially quoted, she started down the trail of the real cause of the shortage without realizing it.
Obama-administration officials have reportedly become alarmed by doctor shortages, especially since millions of previously uninsured people would gain coverage—and therefore increase demand—if the president manages to pass national health care reform. [link dropped, bold added]
All one has to do is look at the artificially inflated demand for care caused by these planned policies as well as existing subsidized care through Medicare and Medicaid, and add to the equation the imposition of price controls brought about by those programs, and we have a classic price control/shortage/reduction of supply situation. For details, let us consult George Reisman and his fascinating study of the destructive nature of price controls in "The Government Against The Economy." (all of which was later included in CTIE)

When one looks at health care services, not as some magical thing that transcends markets, supply and demand, and price, but just like any other good, it should be easy to see how Reisman's example translates to the "doctor shortage":
A shortage is an excess of the quantity of a good buyers are seeking to buy over the quantity sellers are willing and able to sell. In a shortage, there are people willing and able to pay the controlled price of a good, but they cannot obtain it. The good is simply not available to them. Recalling the gasoline shortage of the winter of 1974 should make the concept real to everyone who experienced it. The drivers of the long lines of cars all had the money that was being asked for gasoline and were willing, indeed, eager, to spend if for gasoline. Their problem was they they simply could not obtain the gasoline. They were trying to buy more gasoline than was available.
Without price controls, prices would have gone up, demand would have gone down, and a shortage would not have occurred. The market would have leveled out, people would have made other arrangements or paid the higher price for gas. In other words, because those who would have been willing and able to pay for gas could have done so. No shortage.

With price controls, there was artificially inflated demand because everyone could afford gas at the much-too-low controlled price, and supply ran out. Shortage.

Substitute the availability of appointments with a primary care doctor (supply) and Medicare/Medicaid-controlled prices for the supply of and price controls on gasoline, and the clear picture emerges.
The preceding discussion showed how price controls create shortages by artificially expanding the quantity of a good demanded. To the degree that the controlled price is below the potential free-market price, buyers judge that they can afford more of the good with the same monetary wealth and income. They judge that they can carry its consumption to a point of lower marginal utility. In this way, the quantity of the good demanded comes to exceed the supply available, whether that supply is scarce or abundant.
What this means is that no matter how much gas, or how many primary care doctors you have, if the price is controlled, there will be shortages. Even without the retiring of large numbers of baby boomer doctors, we would still face long waits and shortages, especially as prices are controlled more drastically and demand skyrockets due to new universal health care programs.

Still, there is demand, even if the prices are controlled. Why are doctors fleeing from primary care?
Price controls also reduce supply, which intensifies the shortages they create.

In the case of anything that must be produced, the quantity supplied falls if a price control makes its production unprofitable or simply of less than average profitability.

It is not necessary that a price control make production unprofitable or insufficiently profitable to all producers in a field. Production will tend to fall as soon as it becomes unprofitable or insufficiently profitable to the highest-cost or marginal producers in the field. These producers begin to go out of business or at least to operate on a smaller scale.
A marginal producer is defined as an "individual producer who is just barely able to remain profitable at current levels of price and production." With the advent of "universal coverage," increased red tape, price controls, and everything else, more and more primary care physicians will fit this definition. Why would someone going into medicine want to live like that if they could go into the relatively unregulated field of plastic surgery?

Returning to Slate, Lapidos concludes her article with a nearly perfect example of how government intervention in the market -- specifically the attempts at central planning -- wreak havoc on the actions and plans of rational individuals and institutions responding to the conditions of a free market.
Ironically, just a little more than a decade ago, there was a doctor surplus. In 1996, a committee of the Institute of Medicine warned that the United States had a surfeit of doctors caused by foreign-trained physicians coming here to work and recommended freezing med-school class sizes and limiting first-year residency positions. A year later, Slate ran an article on an alternative strategy for reducing the number of doctors approved by the federal Health Care Financing Administration. Under the Graduate Medical Education Demonstration Project, 41 teaching hospitals received $400 million in exchange for not training between 20 percent and 25 percent of the medical residents they would otherwise have trained over the next six years. [bold added, links dropped]
While she sees the irony in this tragicomedy, Lapidos' article demonstrates that she suffers under the same profound misunderstanding of free markets and government intervention as do the majority. While she sees how poorly this plan worked, she and the Obama administration and nearly all politicians in this country on both sides of the aisle, take away only the lesson that "if they had just picked the right plan, it would have worked!"

Instead, the solution is not picking the right government plan, nor is it manipulating the market in the false interests of social justice. The only solution is the total separation of economy and state, establishing the only moral economic system that leaves doctors and patients, producers and consumers, free to trade value for value on an open market without government coercion; laissez-faire capitalism.

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