Marcia J. Kramer

Victor R. Fuchs

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research
Volume Title: Determinants Of Expenditures For Physicians' Services In The United States 1948-68
Volume Author/Editor: Victor R. Fuchs and Marcia J. Kramer
Volume Publisher: NBER
Volume ISBN: 0-87014-247-X
Volume URL: http://www.nber.org/books/fuch72-3
Publication Date: 1972
Chapter Title: Introduction to "Determinants Of Expenditures For Physicians' Services In The United
States 1948-68"
Chapter Author: Victor R. Fuchs, Marcia J. Kramer
Chapter URL: http://www.nber.org/chapters/c2549
Chapter pages in book: (p. 1 - 4)Introduction and Summary
Introduction
Expendituresfor physicians' services in the United
States increased by 328 per cent between 1948 and
1969—a growth rate considerably more rapid than that
of gross national product or personal consumption
expenditures, and about the same as that of other
services.' This paper examines the rise in expenditures
for physicians' services and attempts to explain the
pattern of change in the decades following World War II.
We also analyze the very large geographical differences in
expenditures per capita that exist in the United States.
Our study should contribute to an understanding of the
economics of medical care and to an improvement in the
nation's ability to predict and control such expenditures
in the future.
Concern over the cost of medical care is widespread.
Special attention has been focused on the rapid rise in
the price of and the expenditures for physicians' services
because it is said that these services are essential, that the
price is not determined in a competitive market, and
that consumer ignorance gives the physician unusual
control over the quantity and type of service provided.
Furthermore, the extensive growth of third-party pay-
ment, through both private insurance and governmental
programs, is believed to exacerbate inflationary pressures
in this area by reducing the net price to the consumer
and thus encouraging utilization.
The essentiality argument is a complex one and rests
as much on subjective beliefs as on objective evidence.
Basically, a service can be considered essential on two
grounds. The first applies where the demand for the
service is relatively insensitive to changes in income—
where it is regarded as so necessary that (in the absence
of philanthropy, sliding fee scales, or third-party pay.
ment) families with low incomes devote a relatively large
portion of theirbudgettoit.Some elements of
physicians' services are clearly necessities in this sense,
e.g., surgery for an inflamed appendix. Many physicians'
services, however, ranging from well-baby care through
annual checkups to elective surgery, are not so clearly
necessities, whilestill others (like cosmetic surgery)
might well be classed as luxuries.
'The comparable 1948-69 growth was 260 per cent for gross
nationalproduct,230percentforpersonal consumption
expenditures, and 330 per cent for all services (except housing).
A second criterion of essentiality applies to a service
the consumption of which involves important external
effects. Thus, basic education forallis considered
essential in the United Staies partly because of the belief
that thefailureto educate some will have serious
unfavorable repercussions on others. A similar argument
concerning physicians' services could be advanced with
respect to treatment of communicable diseases. At one
time such diseases occupied the bulk of physicians' time,
but currently they are much less important.
Probably more important than the essentiality argu-
ment is the peculiar nature of the market for physicians'
services. When a good or service (without significant
external effects in either production or consumption) is
produced and sold under reasonably competitive con-
ditions,thereisusually no special need for public
attention or public policy. In such cases, changes in price
and expenditures presumably reflect the true cost to
societyof producing the good or service and the
knowledgeable judgment of consumers regardingits
value. With respect to physicians' services, the imperfec-
tions of competition are numerous and powerful. On the
supply side, theseinclude the restrictions on entry
created by licensure and professional control of medical
education, the limitations on practice implicit in the
hospital appointment system, and the absence of price
cutting, advertising, and other forms of rivalry. As for
demand, the difficulty consumers experience in judging
the quality of physicians' services is well known, and it is
thought by some that the physician plays a major role in
determining the quantity of services to be provided [6,
for example].
The concern over cost among consumers has been
reinforced in recent years by that of third-party payers,
particularly the government. Open-ended commitments
to finance services have been followed by very large
increases in price and expenditures; these increases have
stimulated efforts to uncover their causes and to develop
techniques for moderating them in the future.
This study, which is part of that effort, is composed
of two principal parts. The first provides a statistical
decomposition of the growth of per capita expenditures
at the national level. Major attention is focused on the
sharp differences in the rate of change of this variable
between the subperiods 1948-56 (4.1per cent per
1Introduction and Summary Expenditures for Physicians' Services
annum) and 1956-66 (6.6 per cent per annum). Possible
reasonsforthis difference are explored through an
examination of changes in price, insurance coverage,
income, population, number and type of physicians, and
medical technology. Problems of definition and measure-
ment are discussed and some tentative inferences are
drawn.
The second part is concerned with the development
and testing of a formal model to analyze the behavior of
physicians and patients. Cross-sectional (state) data for
1966 are used to gain an understanding of variations in
quantity of services per capita, physicians per capita,
quantity of services per physician, and insurance cover-
age. The consequences for health of differences in the
quantity of physicians' services are also explored.
The principal limitations of the study are attributable
to the paucity of available data. In our analyses we are
frequently forced to exclude certain variables that seem
appropriate on a priori grounds, or to include series that
are only partially indicative of the variables actually
desired. For instance, nearly all of the analysis is limited
to physicians in private practIce. Data on expenditures
for services rendered by salaried members of hospital
staffs are not available. Even for private physicians the
breakdown of expenditures into price and quantity
components is based on indirect estimates rather than
precise direct measures. Finally, it should be noted that
this paper is not intended to review systematically the
literature on physicians' services, although we do con-
sider the views of other observers in the formulation of
hypotheses2
Summaryof Findings
Themost striking finding of this study is that supply
factors (technology and number of physicians) appear to
be of decisive importance in determining the utilization
of and expenditures for physicians' services. This conclu-
sion stands in sharp contrast to the widely held belief
that utilization and expenditures are determined by the
patient, and that information about income, insurance
coverage, and price is sufficient to explain and predict
changes in demand.
2For comparisons of our formulations and conclusions with
those of other investigators, see our bibliography [4], (7], [151,
[161, [17] ,(28], [37], [41].
2
The data we present in Part 1 show that the shift in
the growth rate of physicians' services3 per capita from
—0.4 per cent per annum in 1948-56 to 3.0 per cent per
annum in1956-66is more closelyrelatedtothe
changing nature of medical technology and to shifts in
the number of physicians than to conventional demand
variables. It seems to us that estimates of future "needs"
for physicians are likely to be unreliable unless one can
predictthe nature and extent of future in
medical science. That there will be such changes is
certain; whether they will be of a type that economizes
on the use of physicians' services (such as the antibiotic
drugs) or whether they will increase the requirements for
physicians (suchasorgantransplants)isof crucial
importance. Furthermore, the "need" for physicians'
services should not be treated as synonymous with the
"need" forphysicians;therecord shows that the
quantity of service per physician has been rising over
time, and at a variable rate.
When we turn to an examination of variations in
demand, holding technology constant (in the cross-
sectional analysis of Part 2), we find additional support
forthe view thatthe number of physicians has a
significant influence on utilization, quite apart from the
effect of numbers on demand via lower fees. Indeed, we
find that the elasticities of demand with respect to
income, price, and insurance are all small relative to the
direct effect of the number of physicians on demand. Of
course, the emphasis we give to supply does not deny an
independent role for demand entirely, especially when
the patient is faced with major changes in the net price
of care, such as those created by the introduction of
Medicare and Medicaid.
Because physicians can and do determine the demand
for their own services to a considerable extent, we
should be wary of plans which assume that the cost of
medical care would be reduced by increasing the supply
of physicians. Our analysis suggests that such increases
would at best have limited impact on price, though they
would result in substantial increases in utilization. In
estimatingthesocialvalue of increasedutilization,
3"Quantity" is measured by deflating expenditures by an
estimate of the average price actually received by physicians. It is
not equivalent to number of visits because it also reflects shifts
in the type of physician visited (specialist or G.P.) as well as in
the quantity of tests, x-rays, and other services provided in the
course of the average visit.Expenditures for Physicians' Services Introduction and Summary
however, note should be taken of our finding (in section
2.6) that variations across states in the quantity of
physicians' services appear to have little or no effect on
either infant mortality or the overall death rate. Of
course, an increase in physician supply has other effects
that should be considered. The subjective utility derived
from the consumption of physicians' services is likely to
rise as physicians devote more time and personalized
attention to each complaint, and the indirect costs
incurred by patientswillfallas generalaccessto
physicians improves. The subjective qualitative aspects
of physicians' services are not considered in this paper.
Given the importance of supply, it is of interest to
ask what factors determine it. The cross-sectional analy-
sis throws some light on physicians' locational decisions.
They seem to be attracted by higher prices for their
services, by medical schools and hospital beds, and by
thelevelof educational,cultural, and recreational
opportunities indicated by the average income of the
population. We did not find any evidence for the theory
that encouraging more state residents to enter medical
schools pays off in terms of more physicians returning to
practice in their state of origin. Also, physicians do not
show any special preference for states with low health
levels.This absence of what some might regard as
"professional responsibility" in choice of location stands
incontrasttothebehaviorof physicians already
established in a given location. We find that physicians
practicing in states where the physician-population ratio
is low do provide more services apart from any price
considerations.Indeed, givenlocation,thereis no
evidence to show that higher prices induce additional
services from physicians; there is some reason to believe
that they may have the opposite effect.
One finding in which we have considerable confi-
dence deserves special mention because it reveals the
unusual nature of the market for physicians' services. We
refer to the fact that states with high quantity of service
per capita(Q*)haverelatively low quantity of service
per physician (Q/MD). The coefficient of correlation in
1966 was —0.5. The quantityseriesisadmittedly
imperfect, but errors of measurement in that variable
would tend to produce a positive correlation between
Q*andQ/MD. Thereisgood reasontobelieve,
therefore, that the true correlation is even more negative
than —0.5.Sucha relationship is very surprising under
either one of the following two interpretations of the
Q/MD variable. If itis regarded as a measure of the
average size of the "firm,"4 we would expect a positive
correlation with quantity per capita. If we regard it as a
partial productivity measure, we would also expect a
positivecorrelation with quantity per capita. These
expectations are based on experience with many other
industries [39, for example]. The negative relationship
observed in this industry may be attributed to the
behavior of physicians. Where these are relatively numer-
ous they both increase the demand for their collective
services and cut back on the amount of service each one
individually provides. Where physicians are scarce the
reverse occurs. The result is a strong negative correlation
between Q*andQIMD.
Having set forth what we believe to be reasonable
inferences from the data we have examined, we hasten
to remind the reader of the caveats mentioned through-
out the paper. The statistical experiments performed in
Part 2 cannot be regarded as definitive; obvious weak-
nesses in the data and 'possible shortcomings in the
specification of the model suggest that the empirical
findings should be regarded as highly tentative. Given
the data limitations, the chief contributions of Part 2 are
the development of a comprehensive model of the
market for physicians' services and the development of a
technique for estimating quantity and price by state.
Additional research is clearly essential in order to
predict accurately the consequences of proposed changes
in the financing and organization of medical care, and
theavailability of relevant, reliable data will be of
critical importancetothe success of that research.
Considering the magnitude of health care expenditures
(over $70 biffion per annum), strenuous efforts to make
such data available would seem justified.
4This would be the case if all physicians had solo practices.
3

Determinants Of Expenditures For Physicians' Services In The United States 1948-68

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics