Supplier Induced Demand - The Economics Around Healthcare Reform

The Economics Around Healthcare Reform

The number of physicians entering primary care practice decreases, while the number of specialists increases. Thus, despite the growing number of patients who are demanding access to healthcare, there continues to be a greater supply of specialists, and fewer primary care physicians. This phenomenon leads to greater costs and strain in the system in terms of unnecessary procedures, less access and consumer apathy on cost of care within an already fragmented healthcare system. Additionally, many economists question whether or not doctors use their relationship with the patient for their own financial advantage by recommending and providing health services that the patient would have refused if well informed. This concept is referred to as supplier induced demand.

Access to care challenges are exacerbated by the introduction of the baby boomers into the healthcare system. The aging boomer population is just now reaching the age of 65 and becoming eligible for Medicare. At the same time, fee for service reimbursement from the public payers, followed by the private payers is declining. Not only is the number of primary care physicians dwindling, but this decline in reimbursement causes many of these physicians to reduce the number of appointment slots for Medicare patients. This growing barrier to primary care physicians and the preventive care they provide means that more patients are being seen in less appropriate and less efficient venues of care (such as emergency rooms).

However, the passage of the Patient Protection and Affordable Care Act (PPACA) and the recent SCOTUS affirmation of the individual mandate attempt to solve some of the challenges behind the current supplier induced demand. This includes Section 3021 of the Act, which calls for the development of a Center of Medicare and Medicaid Services Innovation Center (CMMI). This new Center fosters health care transformation by finding new ways to pay for and deliver care that improves quality and health while lowering costs. These innovative models of payment and care service delivery include care for Medicare, Medicaid and CHIP beneficiaries using an open, transparent, and competitive process. Other provisions of PPACA include the establishment of additional methods designed to move the current system from volume (fee for service) to value (outcomes based payment), such as the Medicare Shared Savings Program. Standard economic theory makes no allowance at all for the possibility that the supplier would influence the position of the demand curve.

The patient's role in supplier induced demand has not gone ignored by public or private stakeholders. There are numerous efforts underway to understand how to involve the consumer in shared decision making and taking responsibility for health that may contribute to supplier induced demand. The development of the Patient Centered Outcomes Research Institute (PCORI) was created to conduct research to provide information about the best available evidence to help patients and their health care providers make more informed decisions. PCORI's research is intended to give patients a better understanding of the prevention, treatment and care options available, and the science that supports those options. PCORI was established by Congress through the 2010 Patient Protection and Affordable Care Act but is by law an independent, non-profit organization.

Lastly, reimbursement for providers is mostly on a fee for service basis and services rendered are paid for on an individual basis. There is no limit to the number of services rendered, or expectation that payment is based on any particular outcome. In recent years however, attention has been paid to entities in the industry (payer or payer/provider collaborations) who have innovated on different ways to pay for services rendered which depend entirely on outcomes. These methods hold all parties accountable for the outcomes of the services rendered.