Health Care Reform: Supply, Demand, Price Effects and Shortages

Earlier I wrote about the effects of pre-existing condition reform on insurance companies and health care providers.  In this post I want to talk more broadly about demand for health care services, supply, the price of health care procedures, and shortages.

The health care reform proposal will increase demand for medical services, not much surprise there.  Because anyone can buy insurance without limitations on pre-existing conditions, people who will need extensive service have access to insurance now.  They will likely consume more services.  Even though most indigent people did have some access to health care even before reform, it's different when you know you can walk in and be treated like a regular insured person.  Demand for medical services will increase.

Whenever I'm looking at an industry with rising demand, I immediately wonder how fast supply can respond.  What about health care?

Virtually all training programs for health care professionals are full today.  That includes training to be doctors, nurses, and various technicians.  The educational programs are fully subscribed.  Even if we had vacancies, it takes many years to train a doctor, and some years to train nurses and many technicians.  The health care reform bill has only a few provisions that will increase supply.  There are some efforts to shift available supply to rural areas, and to encourage nurses to go into nursing education.  Generally, however, look for no increase in the supply of health care professionals within the next five years, and doubtful increases beyond that.

(Before the health care reform bill was passed, there had been an expansion of health care education that will continue, but most industry observers think the expansion just barely kept up with pre-reform growth of needs.)

So, demand up, but supply cannot rise in the short-term.  What happens?  Hospitals and clinics bid up the wages of nurses, technicians, and doctors.  They can afford it because they are more often reimbursed for their services, thanks to the insurance reforms.  The price tags on medical procedures have to rise

Okay, now slap me in the face with reality.  Many prices in health care are fictions, rather than market-clearing prices.  Many of the "prices" are set by the government through reimbursement rates.  They may not react to supply and demand.

What happens when demand increases, supply cannot increase in the short-run, but prices cannot adjust to limit demand and induce more supply?  Shortages!  Many people who are used to getting care on a prompt basis will find themselves crowded out by the newly insured.  Nobody will be denied care outright, but waiting times for appointments and procedures will increase.  Providers may begin to limit procedures to manage access to care.  It's not the cold-hearted denial of access for monetary reasons; it's the warm-hearted denial of access to allow someone else to be served.  Feel better?

If you run a business, your employees may well feel that they are getting inferior service from the providers available from the company health care plan.  That will happen even as you have to push some of your insurance costs on to your workers.  Anticipate grumpy workers.

If you run a hospital or clinic, start working on employee retention right now.  Make your organization the most-desired place a health care professional could possibly imagine working–and you won't lose too many people.  More importantly, try to shift as much work as you can to lower level employees.  Use physician assistants and nurse practitioners to the max.  Hire non-medical personnel to maximize the productivity of your trained staff, through scribing (making entries in the electronic medical records system), moving supplies and whatever else will free up the trained personnel's time.

If you run an insurance company, plan on higher costs.