Physician Location Decisions

• Policy problem
• Policy responses: medical school capacity; medical school admission policies; loan forgiveness; other financial aid; payment practices
• Question: if more physicians are produced, will they tend to locate in underserved area

• Harold Hotelling (1929)
• Assumptions: fixed demand per capita population ´ fixed population = fixed total product demand; no location amenities; no induced demand; sellers adjust themselves so that demand per seller equalizes.
• Example in book (p. 187): 3 towns A with 100K, B with 20 K, C with 5 K pop. If there are 12 physicians, they equalize at 1 physician per 10K pop. Then town A has 10 MDs and town B has 2 MDs. If there are 25 MDs, town C gets an MD because equilibrium is at 1/5,000. Trickle down.
• Implication: more doctors-->get movement to smaller communities (inadequate pop. reason they are underserved)
• Not all studies support this conclusion

• Decision to become physician
• Decision to specialize
• Physician surplus/shortage

• Excess number of physicians will generate ever-increasing spending
• Even worse, increased spending will purchase ever less beneficial care and may even be harmful (iatrogenic illness).
• Example of unnecessary surgery
• Idle physicians get out of practice
• All the models of the physician services market except Pauly-Satterthwaite predict that more physicians will lead to higher use. Also strong possibility of less beneficial care.
• Neoclassical economists believe that shortages and surpluses are self-correcting. With increase in physician-population,
• ROR on medical education falls and conversely.
• Leads to fall in applicants which leads to decrease in capacity which leads to fewer graduates which leads to higher ROR.
• Problem is that self-correcting cycles very slow (if this happens).
• Work by Graduate Medical Education National Advisory Committee (1980): predicted surplus of physicians of 150K by 2,000.

• Compare % of communities by population size with at least one physician in given specialty in 1970 v. 1979. Aggregate supply of physicians up.
• For GP/FP, even towns with 2.5-5 K pop. had physicians in these specialties.
• But see diffusion of specialists for smaller specialties (e.g., psychiatry, orthopedic surgery)

• Structure of Article Demand for Physicians Services by 2000: Factors shifting demand for physician services 1983-2000; Effect of growth of CMPs & cost containment

• New technology (MRI, transplants, artifical hearts, genetic engineering)
• Population growth and aging
• New diseases and increased incidence of others (AIDS, herpes, skin cancer) Increased insurance coverage
• Diffusion of physicians to smaller communities leads to time price reduction

• Prepaid group practice in 1983: 1 MD per 840 enrollees (Kaiser in CA)
• Historically, this ratio has decreased by 1.6% per year (Why?)
• With growth @ 1.6% per year, by 2000, PGP would have 1 MD per 640 enrollees
• By 2000, we assume 44% of pop. in CMPs, (24% in IPAs & PPOs; 20% in PGPs)
• Assume IPAs and PPOs use 10% more physicians than PGPs: then 1/640 for PGPs in 2000 and 1/576 for IPA-PPOs.
• This leaves 56% in traditional FFS. Assume FFS uses 25% more MDs than PGP. Then in 2000, ratio 1/480 for FFS.
• Add in resident demand, get demand in 2000 of 592,000 physicians based on projection of 268 million

• U.S. Bureau of Health Professions forecasted 697,000 physicians in 2000. GMENAC forecasted 573,000 to 684,000.
• Look at adjustments to supply in Table 1.
• Balance demand and supply in 2000: 592,000-585,000=7,000 (shortage)

• Students should examine details of summary, but note:
• Even if there were a surplus, have to consider that physicians would turn to new careers, e.g., geriatric and sports medicine, run nutrition clinics, etc., go to towns
• Reasons for differences with past studies: growth in demand; adjustments to supply; get growth in % of elderly served by HMOs