Human Inputs: The Health Care Workforce and Medical Markets

In commenting on the health care workforce, Kenneth Arrow (1963) indentified three elements that are imposed on the natural market for medical care to enhance quality but that also decrease price competition. These are licensure, the rationing of entry into medical schools, and the financial subsidization of medical education. Arrow argues that, to achieve genuinely competitive conditions, all three would have to be eliminated. While he acknowledges that doing so could result in some practitioners of lower quality, in a competitive market without uncertainty consumers would have the opportunity to choose from among practitioners of varying quality at suitably varying prices. Entry barriers simply exclude practitioners whom consumers would not choose anyway.

But Arrow worries. He worries about eliminating licensure. Although high educational standards have made licensure "superfluous" for U.S.- trained physicians, licensure does maintain minimal levels of quality for both international medical graduates (IMGs) and nonphysician clinicians (NPCs), and, therefore, it does has value in alleviating uncertainty. Arrow also worries about eliminating entry rationing. Without it students might be of lower quality, and, although entry rationing may also lead to higher physician incomes, the maintenance of quality is more important. Finally, he worries about eliminating medical education subsidies, fearing that doing so could cause a shortage of qualified medical school applicants, and he suggests that, if subsidies were to be eliminated, insured loans might be used to lessen the financial burden.

Arrow's worries are well founded. A truly competitive market might not supply the quantity or quality of practitioners that are now being sustained through social nonmarket forces. Moreover, a market in which a spectrum of quality is offered at corresponding prices could only work if it were free of uncertainty, but health care is richly laced with uncertainty. Indeed, Americans look to government and social institutions to assure them that practitioner quality will be maintained within a narrow range. Even if the purchase of quality through a competitive market did work, a democracy that allowed health care to be doled out to its citizens at levels of quality that were proportional to their financial capacity would pay a large political price. Arrow reaches the same conclusion. He declares that the laissez-faire solution for medicine is intolerable and explains that licensure, entry rationing, and educational subsidies exist specifically because there are few alternative ways to minimize the risks associated with information asymmetry.

However, despite Arrow's recognition of their merits, the roles played by licensure, entry rationing, and educational subsidies have changed substantially over the past forty years.

• Licensure has shifted from restricting entry to empowering a diverse array of NPCs whose scope of practice overlaps that of physicians. This has less to do with enhancing quality than with the potential to reduce price and increase access. Indeed, the licensing of a broad range of disciplines adds uncertainty about the uniformity of quality that is being offered.

• Entry rationing has shifted from medical school education to graduate medical education (GME), which is also the route of entry of IMGs. However, GME rationing has been seized upon less as a means of sustaining quality than as a way to limit the supply of physicians in order to decrease health care spending.

• Subsidies for medical students have largely vanished because of the belief that there are ample, if not excessive, numbers of physicians. As a result, students are now accumulating increasing debt burdens, which is one factor contributing to the current decline in size of the applicant pool. At the same time, subsidies for GME through Medicare, a process that began after Arrow's article was published, have decreased and now seem further threatened. But there is little enthusiasm for reversing these trends in the face of perceived surpluses of providers.

Thus, while in 1960, licensure, entry rationing, and the subsidization of...