Any views or opinions presented in this article are solely those of the author and do not necessarily represent those of the company. AHP accepts no liability for the content of this article, or for the consequences of any actions taken on the basis of the information provided unless that information is subsequently confirmed in writing.

A quick internet search will produce dozens of articles talking about the shortage of healthcare providers.  One report presents 15 key concerns about physician shortages[1] ranging from too few primary care providers to concerns about medical school capacity. Another article talks about the undersupply of hospital beds caused by reductions in federal funding[2].  On the other hand, the current US delivery system is expensive and studies show that much of our current system is inefficient (i.e., some of our current provider supply is busy doing potentially avoidable things).  The question then becomes is poor supply/demand balancing causing the cost problem with our healthcare system.  This article will discuss some of the key issues surrounding the balancing of supply and demand.

Much of today’s health care system involves limited system-wide planning, but rather is a collection of independent providers doing their own thing.  Hospital planning has frequently followed the mantra “if we build it they will come”.  The hospital with the most bells and whistles attracts both providers and patients, creating a market need to always be the most attractive health system.  The only concern about supply is when budgets are tight oftentimes followed up by a new fundraising program to open up a new wing or capability.  In that community, few are asking what services do we need to be sure we have the capabilities needed to serve the population that lives here.

Unless hired by medical groups or local health systems, physicians oftentimes choose the geographic area they and their family would like to live in, go and set up a practice or purchase an existing practice and begin the process of attracting and serving patients in their desired market. Little professional market adequacy planning is done to determine if this is a desired market or not.  After all the many studies, such as those referenced earlier, suggest more is better.

The contrarian view or approach, for example, employed by major health plans such as Kaiser, is much more methodical and thought out.  Kaiser’s model begins with a market study and the establishment of a primary care clinic, company-owned pharmacy, lab and limited radiology services.  This isn’t just done in a community but is done in a community where they already have members enrolled in their plan and patients are driving 30 – 45 minutes to get their care.  The establishment of a local clinic provides local care but only for the basic items.  As membership increases, they add specialty services and eventually inpatient services as the population reaches a specific point.  Throughout this process is a careful matching of supply with demand.

The gradual hiring of physicians and the appropriate building of facility resources assures the matching of supply with demand.

Planning models suggest for each primary care provider the need is about 1,800 – 2,000 patients.  Similar hospital inpatient analysis suggests that we need one acute care bed for every 1,300 – 1,500 patients.  The gradual hiring of physicians and the appropriate building of facility resources assures the matching of supply with demand.  For example, the plan might be deferring the building of a hospital until there are X members in that market.  A 150-bed inpatient facility can be supported by a membership[3] of about 200,000. Organizations such as Kaiser use this type of planning to be sure they have adequate capacity to serve the population they have.

In the community I live in, we currently have four inpatient facilities serving an area population of about 350,000 people. Many of the residents seek care out of the area since we are close to other major metropolitan areas.  These four hospitals combined have nearly 500 beds or a bed/population ratio of 1.43/1,000.  This compares to the ideal ratio of .75-.80/1,000.  Our community is over-bedded yet, Kaiser is about to build their new facility within the next several years.

Perhaps the financial impact of Kaiser’s thoughtful process should be compared to the market averages for other health plan’s in the area.  For the commercial population Kaiser achieves an overall per person per month (PMPM) cost of about $400.  The best in the market commercial cost outside of Kaiser is more than $500.  The planned results develop a PMPM cost of less than 80% of the rest of the market.  Other health plans contract with providers in the marketplace attempting to get the most favorable price these providers are willing to accept.  Even with value based reimbursement methodologies, the market has not been able to effectively compete with Kaiser.  Kaiser consistently produces a more cost-effective system in an environment of high-quality care.

What are the key differentiators between Kaiser and the traditional market?  Some of the most important ones are:

  • Strong balanced focus on high quality and cost-effective care
  • Matching supply with emerging demand
  • Minimizing wasteful care through effective evidence-based medicine oversight
  • Intense negotiation with its suppliers.
  • Strong focus on wellness and holistic oversight of care

Medicare has recognized Kaiser by awarding them a five-star rating in each of its thirteen plus markets (no other health plan has achieved this).  Kaiser has achieved the most efficient hospital inpatient utilization results (i.e., 130 days per 1,000 on commercial populations).  Kaiser has the lowest premium rates in the marketplace for all of their products.

Perhaps this explains some of the other interest in the market of doing things the way Kaiser does them:

  • United Healthcare’s acquisition of medical groups
  • Intermountain Healthcare’s integrated model
  • Highmark’s acquisition of Allegheny Health
  • Amazon’s pursuit of a better way of doing health care
  • Walmart’s introduction of store-based clinics

Beyond all of these market activities, there is significant evidence to show that healthcare contradicts much of traditional economic supply and demand principles.  In healthcare, supply oftentimes drives demand.  The more supply the greater the use of the healthcare system.  This alone suggests supply needs to be carefully planned.

Yes, I believe the time has come for a different perspective, one that carefully considers more careful planning of health care resources.  Tomorrow’s system will require this to remain affordable.




[3]Assuming 80% commercial, 10% Medicare and 10% Medicaid members.

About the Author

David Axene, FSA, FCA, CERA, MAAA, is the President and Founding Partner of Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.