The Growing Doctor Shortage

Well, it looks like Obama’s Affordable Care Act is set to accelerate a burgeoning problem in medical care: doctor shortages.

In a recent article in the New York Times, Annie Lowrey and Robert Pear write,

In the Inland Empire, an economically depressed region in Southern California, President Obama’s health care law is expected to extend insurance coverage to more than 300,000 people by 2014. But coverage will not necessarily translate into care: Local health experts doubt there will be enough doctors to meet the area’s needs. There are not enough now. Other places around the country, including the Mississippi Delta, Detroit and suburban Phoenix, face similar problems. The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. And that number will more than double by 2025, as the expansion of insurance coverage and the aging of baby boomers drive up demand for care. Even without the health care law, the shortfall of doctors in 2025 would still exceed 100,000.

By 2025, the Association of American Medical Colleges projects that there will be a shortfall of 130,600 doctors. In other words, there will roughly be 30 percent fewer doctors in 2025 as a result of Obama’s Affordable Care Act than what would have occurred in the absence of the new health reforms. What good is adding people to Medicare rolls if there aren’t any doctors around to care for them? Primary-care physicians are particularly in short supply. By 2015, there is expected to be a shortfall of 29,800 primary-care physicians.

No matter how one slices it, this ultimately adds up to long waiting lists, lengthier commutes to doctors’ offices, and greater overuse of emergency rooms. Frankly, it leads to worse care.

But how did we end up with doctor shortages in the first place? This is a complex issue that can’t be scrutinized without also considering the rising costs of healthcare. Much can obviously be said here, and I don’t want this post to carry on longer than it should, but I would like to discuss at least some of the salient ways our soaring healthcare costs and burgeoning doctor shortage can largely be attributed to government intervention.

Government-Stimulated Demand for Healthcare 

Simply put, demand has been largely stimulated, unnecessarily, through America’s growing reliance on third-party payers. Since third-party payers, both government and private, foot most of people’s medical bills, thus shielding patients from the true costs and risks of their choices, there is little incentive for the patient to make more prudent decisions. This shielding of consequences is what economists call “moral hazard.” Currently, patients only pay about 12 cents for every dollar spent on health care. In 1960, patients paid for roughly 50 percent of healthcare expenses. Economist Arnold Kling writes, “For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.” Additionally, costs are further muted when employers are given tax credits for providing health care coverage for their employees. Could you imagine the wasteful spending that would ensue if 88 percent of one’s grocery bill was covered by the government or Blue Cross Blue Shield?

It’s this moral hazard that leads Arnold Kling to sardonically refer to health insurance as health “insulation.” Kling notes that legitimate insurance, such as fire insurance, “provides protection against rare, severe risk.” Kling sees real insurance as being characterized by low premiums, infrequent claims, and large claims, whereas health insurance is the exact opposite, “Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.”

My criticism even applies to private health insurers. Government policy indirectly stimulated the formation of private health insurance providers and accelerated their adoption by consumers. Prepayment plans truly began in 1910 with the Western Clinic in Tacoma serving lumber mill owners, but it was under the auspices of Franklin Roosevelt that prepaid health insurance took flight. FDR capped wages during World War II, which meant that employers had to come up with some means of attracting and keeping employees. In those days, insurance plans were untaxed, which, in combination with the frozen wages, hastened this rush toward employer-provided health coverage.

Our current Blue Cross Blue Shield prepayment model quickly supplanted the more cost-conscious indemnity model due to a favorable tax and regulatory environment. Before 1986, Blue Cross Blue Shield was considered tax exempt whereas indemnity insurance providers were afforded no such luxury. Sheldon Richman writes,

Under the old-style indemnity plans (which individuals shopped and bought for themselves), contracting a catastrophic disease triggered a fixed insurance payment — to the policyholder – according to an agreed-on predetermined schedule. The money was hers. If she could find services that cost less than the insurance payment, she pocketed the difference. Of course, this provided an incentive to be cost-conscious in buying medical care. Homeowners’ and other types of insurance still works like this. In contrast, under the Blue Cross Blue Shield model pushed by government — which began not as insurance but as a prepayment plan for doctors and hospitals — the policyholder never sees a dime. Treatment simply sets in motion a process in which the insurance company sends a check to a hospital, lab, or doctor. No treatment, no payment. The individual has no reason to shop around (there can be great variation in prices), or to question whether a test or procedure is necessary, or to even ask what anything costs. What’s the point? It would seem only to save the insurance company money.

Medicare Fee Schedule

Not only has government policy engendered the rise in people’s demand for health care service through impersonal third-party payers, but it has also further distorted the health care market through the enactment of the Medicare fee schedule.

The Medicare fee schedule’s origin extends back to 1985 with the research of Harvard economist William Hsiao, who developed the Resource-Based Relative Value Scale (RBRVS). In 1988, Hsiao’s results were sent to the predecessor of the Centers for Medicare and Medicaid Services, the Health Care Financing Administration. In 1989, George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1989 into law, which switched Medicare to the RBRVS  payment schedule. The RBRVS assigns a “relative value” to all doctors’ services and procedures, which are then multiplied by a conversion factor. The criteria for determining the “relative value units” or RVUs of a physician-administered service are physician work, practice expenses, and, to a lesser degree, professional liability. However, in reality, Hsaio’s convoluted algorithm in determining RVUs is little more than scientistic mumbo jumbo.

Drs. Rick Mayes and Robert Berenson do a fine job relating Hsiao’s bizarre methods. They write,

He [Hsiao] put together a large team that interviewed and surveyed thousands of physicians from almost two dozen specialties. They analyzed what was involved in everything from 45 minutes of psychotherapy for a patient with panic attacks to a hysterectomy for a woman with cervical cancer. They determined that the hysterectomy takes about twice as much time as the session of psychotherapy, 3.8 times as much mental effort, 4.47 times as much technical skill and physical effort, and 4.24 times as much risk. The total calculation: 4.99 times as much work.  Eventually, Hsiao and his team arrived at a relative value for every single thing doctors do.

Around the time the RBRVS was put into place, the American Medical Association created its Relative Value Scale Update Committee (RUC), which would serve as an advisory group to the Centers for Medicare and Medicaid Services. RUC is a group comprised of 29 physicians from various specialties who are tasked with updating the relative values of more than 7,000 Current Procedural Terminology (CPT) codes as well as recommending values for new CPT codes. Nine times out of ten, the CMS takes RUC’s advice.

Though the Medicare fee schedule is revised annually, thanks to the input from those shadowy folks at RUC, the trend in recent years has been declining Medicare reimbursements, despite our population’s growing demand for healthcare. While healthcare costs are rising 1.5 times faster than GDP, reimbursements are being slashed. If we had a truly free market, rising prices for health care would be necessary to bring demand into equality with the supply of doctors. Alas, Medicare doesn’t rely on market forces, so more and more doctors are having to close up their private practices, laden with debt, or sell out to powerful hospitals.

As it stands, 50 percent of doctors have a private practice. As those doctors progressively sell out to hospitals, healthcare becomes consolidated, which surely reduces some costs, but such consolidation also brings with it further, unintended costs, especially against those living in poor rural areas. They are the ones that are most dependent on family physicians. Things are bad enough that a growing number of doctors who manage to eke out an existence are beginning to refuse new Medicare or Medicaid patients since they aren’t worth the trouble. The Affordable Care Act is expected to add 13 million people to Medicaid rolls beginning in 2014; the total is likely to hit 26 million by 2020. Medicare beneficiaries, on the other hand, are expected to reach 73.2 million by 2025, up from the 50.7 million that are currently enrolled. According to a national survey of 2,232 physicians across specialties, 36 percent are no longer accepting new Medicaid patients, while 26 percent say they are seeing none at all due to inadequate reimbursements. The same survey found that 43 percent of adult psychiatrists, 25 percent of family practitioners, 24 percent of ob-gyns are no longer taking new Medicare patients.

Not only has Medicare’s fee schedule helped drive private practices into near obsolescence, but it has led to a disproportionate number of specialists. The Wall Street Journal’s Anna Wilde Mathews and Tom McGinty note that “A recent analysis for the Medicare Payment Advisory Commission, or MedPAC, a Congressional watchdog, calculated how much American doctors would make if all their work was paid at Medicare rates. It found that the primary-care category did the worst, at around $101 an hour. Surgeons did better, at $161. Specialists who did nonsurgical procedures, such as dermatologists, did the best, averaging $214, and $193 for radiologists.” On average, specialists earn about $3.5 million more than primary-care physicians in their lifetime.

Ultimately, Medicare’s price fixing matters. Roughly a quarter of a physician’s patients are Medicare patients and it is only going to grow as the Baby Boomers continue to reach retirement age. Not only that, but many likely don’t realize that 85 percent of private health insurers base their payments on Medicare’s fee schedule. Some private health insurers simply add a percentage to the Medicare fee schedule, whereas others use the RBRVS with a different conversion factor. In other words, the Medicare fee schedule is almost unavoidable.

Finally, I’ll leave you with the remarks of Princeton economist and New York Times contributor, Uwe Reinhardt, who offered a candid observation on the Medicare fee schedule: “Medicare price-setting in the United States has been characterized by its critics as ‘dumb price-fixing,’ although it is not clear to me that the price-discriminatory practice in the private insurance markets represents more intelligent price-fixing. Price-setting by Medicare has also been decried as a Soviet approach to pricing, and I fully agree that it is.” I never thought I’d ever agree with a Princeton economist with a writing gig at the New York Times, but do I ever!

Government Distorting the Supply of Doctors

Not satisfied to leave a job half done, the government does more than stir up artificial demand for healthcare; it directly tampers with our nation’s supply of it, as well.

The first notable imposition came by way of the American Medical Association. Organized in 1847, the AMA sought to tame the wild medical landscape by pleading before state legislatures that they create state medical licensing boards and that states install rigorous, uniform standards for all medical schools, with the AMA or the state medical board serving as arbiters of quality. By 1900, the AMA’s campaign had been successful in coaxing all state legislatures to set up licensing through state medical boards. However, it wasn’t until 1910, with the publication of Abraham Flexner’s report on the nation’s quality of medical education, that states began to impose uniformly rigorous standards on medical schools. If a school didn’t withstand the AMA’s scrutiny, it was to be shut down by the state medical board.

What’s funny is that Flexner wasn’t even a doctor—he was just a bankrupt owner of a Kentucky prep school who happened to be blessed with some lofty social connections. Later in life, Flexner even admitted that he knew little about medicine or how to discern medical school quality, but, by then, the damage had been done. Simply put, Flexner believed that there were too many medical schools. State medical boards were empowered through the state legislatures to shut down 25 of the nation’s 166 medical schools by 1913. By the 1940s, there were only 77 schools left remaining. That’s a 54% reduction in thirty years. Currently, the Association of American Medical Colleges represents 138 accredited medical schools in the United States, which is still about 17% less than what the United States had in 1900 despite our population growing by 300%. The number of doctors per 100,000 people in 1963 was 146, which is exactly what it was in 1910. In 1890, there were 159 doctors per 100,000 people, which wasn’t again reached until 1970. Simply put, the Flexner Report led to state governments hitting the health care reset button in near unison.

But at least doctors are more skilled nowadays! True, the quality of doctors in 1970 was far superior to those around the turn of the century, but our poorest and most dependent subpopulations were disproportionately injured as a result of the Flexner Report. The schools that catered to the rural poor and minorities were affordable and provided a means of acquiring dignified employment opportunities for those marginalized groups, but, to Flexner, those schools lacked the flash and rigor of a Johns Hopkins, which meant that they needed to be shut down. It was for their own good. This lack of foresight prevented educational standards from improving through market competition.

Another way that government has tampered with the supply of doctors is through its funding, or lack thereof, of residency slots. Since the Balanced Budget Act of 1997, the number of residents that teaching hospitals could claim for reimbursement through Medicare has been capped, which, in combination with hospitals’ lack of pursuing other funding sources, means fewer doctors are trained than are needed.  And, as far as I understand it, Obama’s Affordable Care Act does nothing to remedy this long-standing constraint.


In the end, I find it amusing that the “free market” has been branded the scapegoat for our escalating health care crisis, while our government has largely escaped blame. Certainly some schemes have been hatched by special-interest groups outside of government, but, ultimately, the government has given legs to such hare-brained ideas. In fact, without the government’s blessing, groups like the AMA would be left with nothing but their impotent ideas floating about in their heads. When one looks at the broad picture, government policy has undeniably shaped our current healthcare outcomes to a large degree, either directly or indirectly. Government has played a notable role in creating the conditions necessary for our profligate third-party payer system to flourish, for the encouragement of unnecessary care through Medicare’s fee-for-service model, and the shortage of doctors through the implementation of the Flexner Report and persistently inadequate Medicare reimbursements.

Sadly, conservatives still stand at the ready to thwart Obama’s forthcoming radical reforms, failing to notice the threat that has passed behind their backs. Obamacare is but another statist brick in a wall of government interventions in the market. In many regards, America already has Soviet-style medicine and, yet, we steadily march deeper into the miasma as if it will provide us with an exit from our current woes. Given this latest projection of growing doctor shortages, I say we’d better hurry up and head back to the oasis, where market forces, prudence, and the old-fashioned rapport between a patient and his doctor all congregate harmoniously. Next time you experience a taste of our nation’s unwieldy health care costs, or notice the tired family physician standing before you and the worn carpeting beneath his feet, or run into the brick wall that is our obstinate third-party payer system, soak it in and tell yourself it’s the fine work of government intervention.

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  1. Pingback: The Canadian Canard « Seeing the Sword

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