Cost - Supply Side Options

In previous posts, I discussed some of the demand-side options that could be used to reduce healthcare costs.  There are also supply-side options for cost reduction.  In general, the following changes can shift the supply of a product or service in a way that will result in lower costs:

• Increased number of suppliers
• Increased production efficiency via technology or process change
• Decreased price of inputs
• Increased profitability of the supplier's other products or services
• Increased expected future price

Let's look at the first option which is to increase the number of suppliers...


In healthcare, the number of suppliers/providers of healthcare services has become a hot topic in debates surrounding healthcare reform.  As I mentioned in a previous post, a shortage of primary care physicians is expected well into the future with predictions of a 40,000 doctor shortage within a decade.  In addition, the supply of nurses is expected to fall short of demand with a projected shortage of 260,000 nurses by 2025.  


Title V, Subtitle C of the healthcare reform bill (PPACA) focuses on the healthcare workforce.  It seeks to increase the supply via a combination of student loans and loan repayment programs, reallocation of existing residency slots, nurse-managed clinics, and grants specifically aimed at getting more primary care physicians into the work force. At HHS.gov, a recent news release states that $290 million in new funding will "support more than 16,000 new primary care professionals” by 2015.  However, I see a few problems with the plan:

1. Congress has yet to appropriate the funds for this.
2. There no focus on specialty training and no real consideration that there could be shortages in non-primary care specialty areas.  This has already become a big problem in Massachusetts.
3. It takes roughly 7 years to train a new physician and get them into the workforce.  I wouldn't expect this to have much impact prior to 2017 or later.
4. Congress capped funding for medical residencies in the late 90s leading to a shortage of residency positions today.  The PPACA redistributes existing residency slots to under-served areas, but it does nothing to lift the cap and create the necessary new residency slots to support an increase in physician supply.

Even if the plan does manage to introduce 16,000 new primary care physicians by 2015, this still falls far short of addressing a predicted shortage of 40,000, and the additional demand created by the newly insured makes it even more likely that demand for care will outstrip the supply.

Given the current supply challenges and the many questions about the PPACA's ability to increase the number of providers, we would need to look at some of the other supply side options to try to meet the demand and reduce costs.  


Next, I will look at the possibilities of reducing healthcare costs through increased efficiency via technology and/or process change in a post soon to come.