No one admires physicians more than the Angry Capitalist.  I know many of them.  They are bright, caring people who give selflessly of themselves as they work long hours, often on a pro bono basis.  I have met very few who are in it for the money, money they very much deserve. 

We need more of them, especially since the government is determined to put another 30,000,000 people into their offices.

Costs can be lowered two ways:  Lower the demand or lower the supply.  I've contended for years that a $1,000 deductible on every health insurance policy would go a long way toward lowering demand.  Insurance should be for the catastrophic losses.  But another way is to increase the supply of healthcare providers, a number that has not kept pace with demand.

An interesting article by Mark J. Perry from June of 2009 examines the issue of just why this may be the case.  Once again, manipulation of the free market system is the culprit.

Greg Mankiw features the chart below on physicians’ salaries in the U.S. vs. various European countries and Canada, showing that MDs in the U.S. make about $200,000, which is between 2 and 5 times as much as doctors make in other countries. How do we explain the significantly higher physician salaries in the U.S.?

One explanation is the restriction on the number of medical schools, and the subsequent restriction on the number of medical students, and ultimately the number of physicians. Consider the difference between law schools and medical schools.

In 1963, there were only 135 law schools in the U.S., and now there are 200, which is almost a 50% increase over the last 45 years in the number of U.S. law schools. Unfortunately, we’ve witnessed exactly the opposite trend in the number of medical schools. There are 130 medical schools in the U.S., which is 22% fewer than the number of medical schools 100 years ago (166 medical schools), even though the U.S. population has increased by 300%. Consider also that the number of medical students in the U.S. has remained constant at 67,000 for at least the period between 1994 and 2005, according to this report, and perhaps much longer.

The charts below tell an interesting story:

The number of applicants to medical school keeps going up, by more than 21% between 2003 (34,786) and 2008 (42,231), despite the fact that the number of students admitted has gone up by only about 9% (from 16,538 to 18,036) over that period.

waBecause of the 21% increase in applicants since 2003 for only 9% more openings available in U.S. medical schools, the number of medical school applicants per available opening in medical schools increased from 2.1 in 2003 to 2.34 in 2008 (see chart below).

Because of the significant increase in applicants for a much smaller increase in available openings in medical school, the percent of medical school applicants accepted has decreased from 47.5% in 2003 to 42% in 2007, before increasing to 42.7% in 2008 (see chart below).

Bottom Line: One reason we might have a “health care crisis” due to rising medical costs, and the world’s highest physician salaries is that we turn away 57.3% of the applicants to medical schools. What we have is a form of a “medical cartel,: which significantly restricts the supply of physicians, and thereby gives its members monopoly power to charge above-market prices for their services.

In his classic book Capitalism and Freedom, Milton Friedman describes the American Medical Association (AMA) as the “strongest trade union in the United States” and documents the ways in which the AMA vigorously restricts competition. The Council on Medical Education and Hospitals of the AMA approves both medical schools and hospitals. By restricting the number of approved medical schools and the number of applicants to those schools, the AMA limits the supply of physicians. In the same way that OPEC was able to quadruple the price of oil in the 1970s by restricting output, the AMA has increased their fees by restricting the supply of physicians.

If we had 130 law schools (instead of 200) and 200 medical schools in the U.S. (instead of 130), it would probably go a long way to solving our “health care crisis.” More MDs at much lower salaries along with fewer lawyers and lawsuits would be a good thing, wouldn’t it? Can’t breaking up the medical cartel, training more physicians, and lowering MD salaries be part of the discussion for health care reform?