Does supply create its own demand in health care?

Say’s Law, discussed in college-level economics is often summarized as “supply creates its own demand.” In recent years this notion has been applied in health care. For example, a provider who buys a pricey new CT machine may be more likely to find reasons to use it. In general –because of examples like this– I tend to believe supply does create its own demand in health care.

A NEJM article (Clarifying Sources of Geographic Differences in Medicare Spending) urges us to reexamine this assumption. The authors compared Medicare spending across regions and found the results were not so straightforward. There is plenty to say about this article –and I would if I weren’t about to jump on a plane.

But one thing stands out for me: the limitation of doing this and other cost/spending analyses using just Medicare data. Sure Medicare is the biggest individual spender and the data are available, but should we really ignore the whole private market?

A Medscape writeup on the article (Study May Refute Theory That Physician Supply Boosts Healthcare Spending) says

Dr. Zuckerman, a senior fellow in health policy at the Urban Institute, and his coauthors analyzed Medicare spending — considered a proxy for all of healthcare — from 2000 through 2002

I don’t consider Medicare a proxy for all health care and you shouldn’t either without more evidence.

The authors of the NEJM piece are careful not to extend the implications too far beyond Medicare and I hope others don’t either.

May 14, 2010

One thought on “Does supply create its own demand in health care?”

  1. Our country is in seriously bad shape, unhealthy, obese, and growing older…fast. So would not the supply and demand argument hold true in reverse? The enormous supply of unhealthy adults and children today creates the demand for affordable health care. Perhaps the real answer to rising health costs in preventative research and development.

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