If you think of Supply and Demand forces they are usually two separate independent components. For example if I am a manager for Coca-Cola what do I have the most control over Supply or Demand? Answer Supply. I can greatly influence the supply by having key displays in stores,

Victor Fuchs writes on Health Care Economics. The following is some analysis I prepared/summarized based on some of his analysis form The Health Economy(Cambridge. Mass: Harvard University Press.)

If you think of Supply and Demand forces they are usually two separate independent components. For example if I am a manager for Coca-Cola what do I have the most control over Supply or Demand? Answer Supply. I can greatly influence the supply by having key displays in stores, shelf presence, vending machine presence, feature pricing, etc. How much influence on demand? Much more limited. I can run commercials, taste tests, promotions, etc, but I can’t force you to buy it and drink it.

What unique ability to physicians have? They can influence both the supply and the demand for their services. In a traditional supply and demand graph what happens as the supply is increased? It shifts to the right. What does this do to the equilibrium price and quantity? It lowers the price and increases the quantity. Has this happened in health care? No. Why? Because the demand for health care services has increases even faster than the supply of Dr’s has increased causing a higher price and a higher quantity of services. This is good for the medical community. Below are some reasons why the demand for health care has increased.

Income-Health care is seen as a normal good. A normal good is defined as something we buy more of as our income rises. As our economy continues to grow, incomes become larger, prompting individuals to consume more elective and preventive health care procedures. A good example is laser or lasic surgery. The average price is approximately $3,800 for the procedure performed in the U.S. and it is generally not covered by insurance.

Tastes and Preferences-Differences in education level and attitudes toward seeking health care will cause the demand to shift to the left or right for various medical services. For example there is less social stigma today of seeking mental health care-so we can expect the demand for psychiatric office visits will shift to the right. Also Dr’s view patients as customers and want to satisfy their desires thus maximizing their long term relationships and hence their profits.

Population and demographics- As we grow in population it is natural we consume more health care. We are also experiencing an aging population who experience a higher need for health care and prescription medication, again shifting the demand for health care to the right.

Dr. Induced Demand-Physicians have a very unique ability few people have. The ability to influence the supply and the demand. Doctors have much more information about diagnostic tests and treatments available than the average person does. We call this asymmetric information. One party has a lot of information, the other very little. This allows the Dr. to determine the amount of health care consumed. Another factor here is most Dr’s in this country are paid on a “fee per procedure” basis. This encourages Dr’s to do more procedures than may be absolutely necessary, shifting the demand to the right, and increasing their incomes. Studies do in fact show where there are greater percentages of surgeons compared to the general population, the demand for surgeries increases. Compare this with a manager for Coca-Cola above. He or she can have a great influence on the supply side but not much influence on the demand side. Thus the two forces are independent. This is not the case in health care.

Unhealthy Lifestyles- Alcohol, tobacco, high fat diets, lack of exercise, reckless driving, etc, can dramatically increase the cost of health care by again shifting the demand to the right.

Defensive Medicine –Dr’s often order more tests than actually necessary to protect themselves against lawsuits contributing to the high cost of medical care.

New Technologies- MRI’s, laser surgery, prostate screening, mammographies, blood analysis, and several other high tech, innovate procedures have come on the market. This causes consumers to demand more of these services as it increases ones utility by preventing future illnesses.

Insurance Coverage(private or government)-For many people who are fortunate enough to have insurance, once the deductible is met-health care becomes “free” in the eyes of the consumer. For example, Sues Aunt has a $100 deductible on her health insurance policy per calendar year. This means she pays the first $100 out of pocket and the insurance picks up the rest. This generally causes over-consumption and rising prices. Sue has noticed her Aunt visits the Dr. frequently and many times for minor issues or illnesses. The increasing number of people who qualify for Medicaid or Medicare further exacerbates the over-consumption.

Poverty- An estimated 48 million Americans are uninsured (79,000 in central NY), and about 36 million Americans were counted as poor in 2003. A family of four making below $18,900 is considered below the poverty level in 2004. For a household of 1 the poverty threshold is $9,300.(3.) With so many Americans poor and uninsured it is apparent the negative impact on heath. If people don’t have insurance they tend to put off preventive care and routine checkups. This will cause them to become more ill before seeking treatment, thus increasing the cost. They also tend to show up in emergency rooms for treatment as they don’t have Dr’s further increasing the cost. While emergency room treatment is the most expensive source of primary care it is often the least expensive for the uninsured and poor as the government ends up paying the cost of the visit.

Medical ethics-Dr’s feel ethically committed to order the best tests available for the patient regardless of the cost, and society generally supports the view that use whatever means necessary to sustain life as long as possible. This affects both the demand and the supply of health care. The demand for health care would shift to the right as Dr’s order more test, procedures, and treatments to sustain life. Should we create a market for human organs? This is a controversial, ethically charged issue.

Since Dr’s have so much influence over both Supply and Demand we need to make sure we are dealing with honest ethical people in the profession. I think most Dr’s fit the bill but there may always be a few more interested in maximizing profits as compared to maximizing patient health. Other professions also have the ability to artificially shift the demand curve including CPA’s, Mechanics, Lawyers, Physical therapists, Dentists, Etc. Bottom line keep in mind these people are professionals but also business men and women, so again we want to deal with honest ethical people who are in professions with the unique ability to influence both supply and demand.

One more note-Business Week-September 25th issue(2006)-On the cover- What’s Really Propping Up the Economy-Health care has added 1.7 million jobs since 2001. The rest of the private sector? none. Article on page 54. I always encourage students to go into careers in health care or businesses serving the health care market as the future is bright and it’s a recession proof industry.

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