The Demand Function for the Market of Physicians
The demand function for the market of physicians as for any other marked depend on many factors. Usually, economists divide six determinants of aggregated demand. Five of them apply to individual demand. The equation for the individual demand is the next:
qD = f (price, income, prices of related goods, tastes, expectations)
Aggregated demand's function has an additional parameter, the number of buyers. The first parameter of the function is the price of the physician service. By the low of demand, the higher is the service's price, the lower will be the number of clients ready to buy it. In 2015, physicians practicing primary care received total median annual compensation of $251,578 and physicians practicing in medical specialties received total median annual compensation of $425,509 (BLS, 2018). Among all physicians population, the demand for primary care specialists will be higher than demand for particular specialties as the first category is cheaper. The visit of specialist from the second group will require need that is more articulated or urgent that will affect the corresponding number of jobs.
The second parameter is the income of buyers. The higher is the income, the more in quantity clients ready to consume physicians services. However, they can consume a limited amount of such services when they are healthy. For US population the income varies from state to state (see the graph below). It is more reliable to start practice in the state with the parameters above average.
The third parameter for demand on physician's market is prices of related goods and services. The growing price of complementary goods such as drugs or machines for tomography will diminish demand, as the total expenses of the client will grow. The same tendency in physician's demand may produce the falling price on substitutes. It is hard to find a direct alternative in a case of sickness, but the prophylactic and healthy lifestyle may substitute the physician's services in the long-term perspective. Currently, the drug prices growth, as well as ones for fitness and food of high quality.
The fourth parameter is preferences and tastes of consumers. In the market of physicians due to specific of the service significant part of the demand is obligatory, but many non-urgent services may be more required with the promotion of medical care, white teeth, enlarging the list of psychiatric deceases and so on.
The fifth parameter is the number of buyers (for aggregated demand) that affect the quantity of physicians services required directly. Due to the fast aging of US population, the aggregated demand will spur growth. The ability to pay to get support by social programs, better health insurance, and individual savings. Both factors make the revenue forecast in the industry positive (IBISWorld, 2017). The projection for 2015-2030 years presented in the graph below.
The sixth parameter is expectations about prices on the market. The higher expected prices lead to the higher wish to buy now. However, in the case of physician's services, it is usually impossible to get them in advance. On the other hand, possible diminishing of the price in the future may lead to postponing the visit to the doctor with some non-urgent problem.
The expected elasticity for the market of physicians is low as in a case of serious disease the medical care is required, but in some common cases the visit of the doctor may be postponed or declined. Thus, the elasticity of demand for a population with worse insurance will be higher. The price elasticity of demand for physicians market is high, but varying by type of service. Demand response is lower for children, in larger firms, among hourly waged employees, and for sicker people (Ellis, Martins, and Zhu, 2017).
Supply Determinants
Main determinants of supply for the market of physician's services are production cost, technology, number of sellers, and expectation for future prices. The production costs within the economic analysis divide into fixed, variable, and marginal costs. The fixed cost to become the physician practicing individually or working for the organization includes payments for education (interpretable as initial investments into the project). The growing tuition costs in this context will limit supply on this market.
Fixed costs in the process of services realization on the level of the physician as professional will include next regular studying and development, while on the organizational level it will be renting of the clinic building, utility payments, and administrative payments to non-medical personnel. Also, fixed costs will generate marketing, HR, IT, accounting and other required processes realization not related directly to healing clients. Licensing of medical services, regular passing the attestation for license prolongation, and payment of taxes to the government (on the property for example) also add to the category of fixed costs. In a case, the clinic finds it relevant the complex equipment may be bought, and in this form, this unit will generate fixed costs, as well as medical personnel working for a fixed wage.
The labor in the industry is very expensive; wages are the highest of all occupations (BLS, 2018) that is a plus for physician as an employer, but a negative factor for the clinic organizer. Input cost "compensation of employees" takes about 11-12% of health expenditures in the US (OECD.Stat).
The variable costs for the market of physicians services include materials and instruments used in the procedures, drugs, and chemicals, hours of complex equipment and supplementary personnel renting, medical personnel getting flexible wage (per client served/per hour of work).
Marginal costs for this market depend on the complexity of services. In general, they are low, as the proportion of fixed costs to maintain the clinic to variable costs to keep it running is high. However, exclusions are possible, for treating such diseases as cancer. Each new course of therapy will add a lot to the total check, the reason in the last case higher role of variable costs (drugs, procedures).
Growing costs in the market will lead to lower potential profits for participants and less interest of firms to offer discussed services. In the context of the difference between common and complex medical services mentioned above, there will be more supply by family therapists than by oncologists.
The quantity of sellers is the determinant of supply as well. More medical care firms provide higher supply. Today on the US market 2999 businesses (hospitals) employing 5.4m specialists. The healthcare reform, meanwhile, catalyzes the market consolidation, the outcome of this action for industry players is the economy on scale and minimization of fixed costs as well as a better position in the negotiations with payers and suppliers (IBISWorld, 2017). The position of independent physicians is getting worse in competition with hospitals. As a result, their percentage in the population of specialists falling from 57% in 2000 to 33% in 2016. The percentage of employed female physicians in 2016 is 72%. (Wood, 2016). The revenue of physician depends on the form of employment, "in primary care, self-employed physicians ($229,000) make more than employed physicians ($207,000). Similarly, among specialists, self-employed physicians ($348,000) make more than employed physicians ($274,000)" (Wood, 2016).
The other important determinant of the supply is technology, in general with the technological improvement costs of production diminish and potential profit of market participants using new technologies growth, the get an advantage over competitors. However, in the industry of medical care, new technologies lead toward wider opportunities in treating new deceases while in average technologies and related services stay relatively expensive.
Finally, the expectation for future prices plays its role in determining supply. In a case, providers expect higher prices they will try to postpone the operation to get the better outcome. However, in the healthcare services in comparison to goods, this determinant will have lower significance as some services are urgent, and there are incentives more important than prices such as professional ethics and the protection of clients' health and life. Only minor groups of services may be flexible in time. Thus, the current forecast of growing prices and revenue (3.0% a year) in the hospital business (IBISWorld, 2017) will not lead to postponing of operations to the future.
The price elasticity of supply is low as maintaining new services require significant initial investments and, first of all, a long time to prepare specialists. Thus, in the short-term perspective, the supply is not able to adjust to higher prices.
Recommendations
Based on the analysis above, I would give recommendations about the relevance to enter the industry as a physician, take some specialization, use a particular form of employment, and operate in a particular geographic area. The industry demonstrates the growing profitability and needs in the profession as the speed of population aging will only raise. The ability of the client to pay is also growing; however, in the long-term perspective, it highly depends on the health insurance system. The supply side of the market is decreasing due to the integration of hospitals. Low elasticity related to the required long period of education would not allow adjusting it to demand next year. The projected gap between demand and supply is growing that promises high interest to new physicians; it should stimulate the growth of the price on the market.
The higher shortage of specialists is forecasted in the segment of common practitioners (primary care). The other advantage here is the shorter period of education. However, higher elasticity may require keeping costs and prices of services in the limited range and getting higher income through more unique customers.
Choosing between hospitals and individual practice, the first variant is preferable as costs in big organizations are optimized better, and physicians can concentrate on the medical care duties. Also, statistics show such employment is safer legally than individual practice.
In the geographic aspect, it is relevant to go to the state with income higher than average. The relation between growth in income and demand is not linear. Thus, that placement may bring some high-segment clients.
References
BLS. (2018). Physicians and Surgeons. https://www.bls.gov/ooh/healthcare/physicians-and-surgeons.htm#tab-5
Ellis, R., Martins, B., and Zhu, W. (2017).Health care demand elasticities by type of service. http://blogs.bu.edu/ellisrp/files/2017/04/EllisMartinsZhu_Service_Elasticities_20170411.pdf
HIS Markit. (2017). The Complexities of Physician Supply and Demand: Projections from 2015 to 2030. https://aamc-black.global.ssl.fastly.net/production/media/filer_public/a5/c3/a5c3d565-14ec-48fb-974b-99fafaeecb00/aamc_projections_update_2017.pdf
IBISWorld. (2017). Hospitals – US Market Research Report. https://www.ibisworld.com/industry-trends/market-research-reports/healthcare-social-assistance/hospitals/hospitals.html
OECD. Stat. (2017). Input costs for health care provision 2017. https://stats.oecd.org/Index.aspx?DataSetCode=SHA_FP
Statista. (2017).Median household income in the United States in 2016, by state (in current U.S. dollars). https://www.statista.com/statistics/233170/median-household-income-in-the-united-states-by-state/
Wood, M. (2016). 20 key insights into the world of independent physicians; 33% of US physicians are independent. https://www.beckershospitalreview.com/hospital-physician-relationships/20-key-insights-into-the-world-of-independent-physicians-33-of-us-physicians-are-independent.html
