eco question

Health Economics ECON 5860 PROF. KURT LAVETTI

THE SUPPLY SIDE OF HEALTHCARE MARKETS

PHYSICIAN LABOR MARKETS

Physician Labor Markets

 Common view that there is a “shortage” of doctors and nurses in the US

 What is a shortage?  Shortage is a perception that the quantity outcome in the

market is lower than it “should be”

 How can you tell if there’s a shortage?  Several possible indications could be that a patient has to

wait “too long” for an appointment to see a doctor  May have to drive “too far” to see a doctor

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Geographic Disparities 5

Entire county is Primary Care Shortage Area (PCSA) Part of county is a PCSA Not a PCSA

Center for Medicare and Medicaid Services (CMS) has Provider Incentive Payments to encourage doctors to move to shortage areas

Physician Shortages in the Media 6

Source: http://healthsciences.utah.edu/notes/images/transparency. pdf

Labor Shortages 7

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shortage

• A shortage means that at a given price, the quantity supplied doesn’t equal the quantity demanded

Labor Shortages

 Shortages cannot exist in the long run in an efficient market with free entry

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Adjust wages

Dynamics of Supply Shortages

 In the short-run shortages could occur if it takes time for supply to react to a change in demand  Training physicians and nurses takes a long time

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Dynamics of Supply Shortages

 Suppose there is an unexpected shock to demand  In the short-run supply can’t respond  There must also be something restricting wages from rising to

w2, creating a short-run shortage

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“Shortage” caused by combination of: 1. Unexpected demand shock 2. Inability for supply to respond

quickly 3. Something preventing

market prices from adjusting to competitive equilibrium price

One Policy Solution: Increase Wages 11

• Why are there “too few” doctors? • Is it really because wages are too low? • US graduates plateau, but fraction of new MDs that are foreign-

trained doubled (21% to 45%) during the 1990s

Source: census.gov

One Policy Solution: Increase Wages 12

• Are wages really the problem though? • If there is a “shortage” in orthopedists, should the government intervene

to increase salaries above $413,000 per year to incentivize more orthopedics students?

Source: Medscape Compensation Report 2014

One Policy Solution: Increase Wages 13

• An international perspective on physician salaries in the US

Policy Question: 14

Entire county is Primary Care Shortage Area (PCSA)

Part of county is a PCSA

Not a PCSA

Suppose we want to set policies to fix the geographic disparities in physician supply • What is an

example of a policy that could achieve this goal?

• How should we measure shortage areas?

• What kinds of statistics should we use?

The Trouble with “Shortages” 15

Source: Scheffler 2008

• Wait times (number of days required to wait in advance of appointment) are often highest in areas where there are more physicians

• In Boston the wait times to see a doctor are twice as long as the national average

• Should policymakers intervene to fix this shortage?

• What if you then find out that Boston has 7 times more cardiologists per person than Detroit, and 5 times more than San Diego. Is there still a “shortage”.

16Non-Physician Healthcare Labor

• The supply of nurses and physician assistants relative to the number of doctors has remained fairly constant

• Average salaries of nurses and assistants have changed similarly to physician salaries

• Nurses earn about 33% of physicians, PAs earn about 37%

• Some states have begun allowing nurses and PAs to treat patients and prescribe drugs in effort to reduce shortages

• Stange (2012) finds that allowing more autonomy for NPs and PAs has no effect on utilization, access, prices, or use of preventative care

To Understand Shortages, Start at the Beginning: The Training of Physicians

Medical school

 Entry into med school is competitive and selective worldwide

 In the US, about 50% of applicants are not accepted into any medical school

 Medical school can be very expensive and lengthy

 US: Students pay about $140k -- $225k for four years

 Total cost of training a new physician, including residency, is around $500k - $1 million per physician

 After medical school need to complete a residency (hands- on training in a hospital) for 3-10 years depending on specialty

 Salary remains relatively low during residency

Physician Earnings, and the Rate of Return to Specializing 19

• Although completing training in a specialty area takes a long time, is this the only reason why earnings are so much higher among specialists?

Source: Medscape Compensation Report 2014

Explanations for High Specialist Salaries

 Market explanations:  Longer hours

 More time in residency

 Differences in ability

 Barriers to entry that prevent competition

 Bhattacharya (2005) estimates the rate of return to specializing relative to becoming a primary care (“family practice”) physician

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Bhattacharya (2005): Specialty Matching and “skill premiums”

 Studies the question: what factors can explain the large differences in earnings across medical specialties?

 Finds that differences in skills (board exam test scores, medical school performance) cannot explain differences in wages

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Bhattacharya (2005): Explaining Higher Salaries of Specialists 22

Adding in market explanations

Conclusion: Market explanations can explain less than 50% of earnings differentials

Hours of work

Observed differences

Unobserved characteristics that affect specialty decision

Adjusting for timing differences (longer training)

Bhattacharya (2005): Remaining Explanations for Earnings Premium

 If supply and demand factors only explain half of the earnings differences between primary care and specialists, what could explain the rest?

 2 main possibilities:  People dislike some aspect of specialist jobs (seems unlikely)

 Barriers to entry into specialties cause earnings to remain above the level that would occur in a competitive market with free entry

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Barriers to entry

 In 19th century, becoming a doctor was simple—no regulation in training, anyone could claim to be a doctor or run a medical school

 American Medical Association  Set pre-req’s for medical school  Set standard 4 year curriculum  Require doctors to have a license to practice  1910 Flexner Report helped shut down low-quality

med schools

 Result: fewer med schools and med students

Effect of Supply Constraint

 If the AMA constrains quantity, we could see what looks like a persistent shortage

25q

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D Shortage

Tradeoffs from barriers to entry  Because of barriers to entry, consumers have to

pay above the competitive price  Physicians therefore earn monopoly rents (wages above

the competitive price due to artificial supply constraint)

 However, barriers to entry can help ensure that physicians are qualified

PHYSICIAN BEHAVIOR

Outline

 Simple theory of physician choices  Supplier-induced demand hypothesis  Small Area Variations (SAV)

 Why are costs so high in McAllen, TX?

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Some Basic Theory

 What do physicians maximize?  Physicians are both workers who supply labor and

often small business owners  As workers, physicians get utility from income and

leisure time  However, physicians also have the ability to induce

their patients to demand care, but dislike doing so  Utility = U(Y, L, I)

 Y is net income (increases utility)  L is leisure (increases utility)  I is the degree of ‘artificial demand creation’

(decreases utility, but increases income)

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Supplier-Induced Demand

 Relies on the familiar concept of information asymmetry between provider and patient

 Physicians can alter quantity demanded, all else equal, by varying the ‘accuracy of advice’  Empirical question is do physicians actually do this

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Income vs. Inducement

 Trade off between utility gains from additional income, and disutility or conscience cost of artificially inducing demand

 A decrease in the profit rate will, in theory, lead to more demand inducement

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• m is profit rate per unit of care provided

• Q0 is quantity of care without inducement

• I is amount of care induced

• Suppose an increase in competition reduces m to m’

• May increase induced demand from IE1 to IE2

Question

How would you empirically test whether physicians induce demand?

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Circumstantial evidence for induced demand and why it isn’t conclusive

Observation 1. Whenever hospitals expand

capacity, they are immediately full

2. More surgeons leads to more surgery

3. More doctors in town is correlated with higher prices

4. Doctors who own their own labs do more lab tests

Criticism There could have been excess

demand to begin with

Could be due to reverse causation

Could be due to geographic differences in quality or changes in quality over time

Could be reverse causation, also patients could value the convenience

D1

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Supply and Demand Model of Supply-Induced Demand

Initial Equilibrium

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Supply and Demand Model of Supply-Induced Demand

New entry increases competition

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Supply and Demand Model of Supply-Induced Demand

Physicians respond by inducing demand, artificially shifting demand curve outward to create more business

Empirical Evidence of SID

 Physician supply increases quantity of services  Fuchs (1978) finds a 10% increase in supply of

surgeons increases the number of surgeries by 2.8% (After controlling for the fact that surgeons prefer to locate in areas with higher demand for surgery)

 One theoretical explanation for this is the target income hypothesis  Physicians expect to make a certain income (after

large investment in training) and if their income is too low they induce demand to increase income

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Supply-Induced Pregnancies?

 Dranove and Wehner (1994)  Use same statistical approach from other studies,

but test whether increase in supply of obstetricians can “induce demand”

 Find evidence that obstetricians do induced demand

 This is obviously not possible, so suggests that there is something wrong with the statistical model that is probably also wrong in the other studies as well

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A Clever Test of Induced Demand: What Happens when Physicians become Patients?

 Johnson and Rehavi (2014) study the choice between caesarian section or traditional delivery during childbirth

 Caesarean sections are generally much more expensive and more profitable for the hospital and physician

 Do physicians overuse c-sections because they are more profitable?

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Induced Demand for Profitable Services

 To study this question, look at choices made by female physicians (or just obstetricians) when they are giving birth themselves

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Small Area Variations in the Use of Medical Care

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Small Area Variations

 A large amount of variation in the use of medical care and in total medical spending occurs across small-market areas

 What explains this variation?

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Spending Variations 43

Source: Dartmouth Atlas of Health Care

What are some explanations why spending might be so different in different geographic areas?

Spending Variations 44

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Categorizing Care

 Dartmouth Atlas classifies the variations in care into three categories  Underuse of effective care  Misuse of preference-sensitive care  Overuse of supply-sensitive care

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Underuse of Effective Care

 Services that are of proven value and have no significant trade-offs  Example: Eye exams for diabetics  55 percent get recommended care (McGlynn)

 Receipt of recommended care in Medicare is inversely correlated with spending

 Possible explanations  Too many doctors with none clearly in charge and

responsible for managing organization of care  Financial incentives in accountability are lacking

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Misuse of Preference- Sensitive Care

 Misuse of care that involves trade-offs affecting quality and/or length of life where consumers tend to have strong (but potentially uninformed) preferences  Example: Hip and knee replacements  Variation in breast cancer treatments

 Possible Explanations  Practice style hypothesis: Local medical practice

styles or “medical culture” has a strong influence on treatment choice rather than recommended guidelines

 Imperfect information about “best” medical decisions

 Not supply driven

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50 Geographic differences in use of “optional” care, after conditioning on characteristics of population and physician supply

Supply-sensitive care and moral hazard  Supply-sensitive care refers to health services whose use

depends greatly on the supply or availability of that service  Example: a doctor’s reliance on MRI technology may depend on

how accessible an MRI machine is to him

 Length of stay in a hospital could depend on how much vacancy there is at the time

 Hypothesis: doctors with greater access to resources will tend to overprescribe care

Supply-sensitive care

 If demand for care is sensitive to supply, then we would expect hospitals with more resources to have larger expenditures

 Dartmouth Atlas shows evidence of a positive correlation between # of hospital beds and # of hospital discharges  Suggestive evidence that the variation is at least in

part due to technology overuse

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• Strong correlation between total hospital capacity and utilization of hospital care

• Very weak correlation between hospital capacity and certain medical care that can’t easily be induced--like treating a broken hip

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Attempts to Quantify Variation

 Difficult to precisely quantify what causes this variation in medical utilization patterns

 Finkelstein et al (2016) estimate that differences in patient health and patient preferences explain 47% of the geographic variation in spending  Remaining 53% is due to place-specific factors,

including differences in underuse, misuse, and overuse

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To Understand Behavior Look to Incentives—what Affects Provider Incentives?

 Financial Incentives  Do physicians change the medical advice they give to patients

in response to changes in prices?

 Intrinsic Motivation  What happens when physician ratings are made publicly

available?

 Does the desire to have a high rating affect the way doctors treat patients?

 Is this good?

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Provider Incentives: Clemens and Gottlieb (2011)

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• Study how physicians respond to exogenous change in financial incentives

• Medicare reimbursements are based in part on geographic adjustments (reimbursement = base price*adjustment factor

• Eg geographic adjustment factor is higher in NYC than in Columbus because it costs more to deliver care in NYC)

• In 1996 there 210 geographic regions, and in 1997 to simplify things reduced to 89 regions

• Physicians in many areas had exogenous shock to reimbursement rate from Medicare

Clemens and Gottlieb (2014) 58 Price adjustment regions before change

Clemens and Gottlieb (2014) 59 Price adjustment regions after change

Clemens and Gottlieb (2014) 60 Change in prices caused by geographic adjustment policy

Clemens and Gottlieb (2014) 61

Clemens and Gottlieb (2014)

 Exogenous change in prices  2% increase in payment leads to a 5% increase in

care provision  Elective procedures respond more strongly  Price increases lead practices to buy more

expensive equipment like MRI machines  No impact on health

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