Physician Income, Supply and Demand, and the Dysfunctional Medical Care Market

Today’s Managing Health Care Costs Indicator is  $1.6 million

University of Chicago’s Casey Mulligan had a post in the New York Times Economix blog earlier this week asserting that supply and demand played a substantial role in physician compensation.   He notes further that increase in physician income will drive more smart young people into the profession which would exert downward pressure on physician income. This creates a traditional macroeconomic equilibrium where the amount of physician income should be strongly related to the value those physicians are bringing to their patients.

Increasing the number of physicians could indeed lower physician income.   However, increasing the supply of physicians is highly likely to raise the overall cost of health care, because there are elements of standard macroeconomic theory that simply don’t apply to medical care.

1.     Physicians are increasingly employees of larger organizations.  These organizations, whether they are hospitals or health systems or insurance companies, could possibly lower physician income if there were a larger supply of physicians.  However, physician income by itself is a relatively small portion of the total cost of medical care.  Some have estimated that the downstream revenue for a hospital from a single primary care physician exceeds $1.6 million.   

2.     Utilization of medical services is not mediated simply by patient demand. Many or even most medical services are ordered by physicians, and patients have little ability to second-guess their physicians’ recommendations.  Patients don’t come to me (usually) demanding specific diagnostic tests!  More docs lead to more appointments, more tests, more diagnosis (including false positives) and more overall expense.

3.     Medical facilities, in most instances, have been like the “field of dreams” where if you build it “they will come.”   This is especially true of new high-tech procedures with high fixed initial capital costs.   Communities that have proton beam radiation therapy equipment, surprise, use it!   The same is true of physicians and physician-equivalents.   More supply won’t necessarily lead to lower prices – it will lead to more use.

4.     Physicians often do “income targeting.”   If their income falls short of a target, they are more likely to do additional procedures to increase their income.   Therefore, decreasing unit prices associated with higher supply don’t necessarily lead to cost savings.  

We probably have a genuine shortage of physicians in certain specialties, like geriatrics and child psychiatry.   There’s a debate about whether there is a true shortage of primary care physicians – and Linda Green of Columbia University recently projected no shortage if we appropriately use nurse practitioners, physician assistants, and technology to eliminate unnecessary primary care visits.

If we want to increase physician supply to increase access, let’s expect this to lead to higher overall utilization and increased aggregate medical costs.