By Ed Michael Reggie and Claudia Campbell
We shouldn’t be surprised that health insurance premiums continue to rise at record rates — by 15-20 percent for many employers and their employees in 2016 alone. Between private insurance, Medicare and Medicaid, the number of insured Americans has grown dramatically to nearly 90 percent of the population. While more people than ever before are seeking health care services since the passage of Obamacare the supply of physicians, hospitals and outpatient treatment facilities has not kept pace.
It is a fundamental concept of economics that when demand is increased and supply is restricted, prices rise. But for more than 40 years, state and federal governments have used a heavy hand to limit the supply of new doctors and hospitals entering the market, as well as facility expansions and equipment purchases. To make true progress in bringing healthcare costs under control, we must put an end to this fool’s errand of limiting supply in the face of increasing demand. We need price competition.
According to The Physicians Foundation, 81 percent of U.S. physicians describe themselves as overextended or at full capacity. Legislators and policymakers have created a world in which patients must wait an average of nearly three weeks for a doctor’s appointment. As a result, physicians have no incentive to drop their fees and every reason to nudge them higher. The very essence of a free market — in which prices are the product of a negotiation between providers and payers — is illusory.
Adding to the problem, the American Association of Medical Colleges estimates a shortage of up to 90,000 physicians within the next 10 years. Historically, medical education has relied on federal funding of residency training of medical school graduates. Unfortunately, federally funded residency slots have been capped since 1997 — nearly two decades. There is an immediate need to increase funding for these programs.
The supply of physicians has been further limited by the number of accredited medical schools and their enrollment capacity. State legislatures should make it a priority to approve and subsidize the formation of new public medical schools.
Public policy has been dominated for 50 years by Roemer’s Law, which postulates that physicians respond to increased competition by ordering more tests and procedures. But in today’s connected data-driven world, physician practices are profiled by health insurers. Over-utilizers are readily identified and penalized.
It is time to create a real marketplace. Bringing supply-side market forces to bear will mean adopting an increase in funding for physician residency programs, opening more medical schools while increasing enrollment capacity at existing institutions, and removing impediments to the construction and expansion of healthcare facilities.
Fully addressing the supply side of the healthcare market also means removing artificial restrictions on facilities, such as outdated “certificate of need” regulations, which still exist in 36 states. They were designed to limit hospital expansion under the assumption that if the hospitals currently serving a community were deemed sufficient by regulators to meet demand, allowing another to be built would only increase healthcare costs. Imagine such faulty logic being applied to prevent the construction of new hotels, restaurants or grocery stores. Now “certificate of need” regulations have been greatly expanded to restrict outpatient facilities, and this has only made the healthcare services market more inefficient.
The role and purpose of the hospital has changed significantly, and our regulatory regime should follow suit. Patients and communities are increasingly reliant on outpatient centers for efficient and more cost effective care. To forcefully limit the expansion of these facilities and the hospitals that house them is increasing costs unnecessarily. The states need to cede this control back to the market.
Governmental manipulation of the healthcare market has produced a system fraught by ever increasing demand, supply shortages and rapidly increasing costs. We need a vibrant marketplace in which large numbers of hospitals and physicians compete with one another on the basis of price and quality. Only when we end the experiment in constraining supply, and fully embrace free market principles, will we be able to make real progress toward cost effective health care for all Americans. That time is now, and it’s 40 years overdue.
Ed Michael Reggie is chairman of GuideStar Clinical Trials Management. Claudia Campbell, is professor emeritus of global health management and policy at Tulane University.