San José State University
Thayer Watkins
Silicon Valley
& Tornado Alley

Supply and Demand for Medical Services in
the U.S. with the Medical Cartel in Operation

In a market ruled by supply and demand the price is established at a level in which the quantity demanded is equal to the quantity supplied.

This is also the case for physicians' services but this market is cartelized because the level of admissions to medical schools is sharply and artifically restricted. The story of how this came to be is told elsewhere. As a result of this cartel there are roughly only half as many physician per thousand population in the U.S. as in countries such as Germany and France. This is with a substantial share of the physicians in the U.S. being foreigners because the cartel system cannot keep them out. Consequently some Americans go through their entire life without ever having an American doctor. Yet there are qualified young Americans who are denied the opportunity to become physicians because of the artificial limitation of the number of admissions to medical schools.

The effect of this system on the earnings of physicians in the U.S. is quite substantial. Physicians in the U.S. earn approximately twice what physicians in Europe earn. The other Anglo-Saxon countries appear to have copied the cartel system operating in the U.S.

All of this is quite important as a policy issue. However, the focus here is on the consequences of this artifical restriction on the supply of physiciens on attempts to increase the demand for physicians' services by particular groups through some program of subsidation.

Under such a program the price of physicians' services rises, but for the situation depicted above the quantity of physicians' services remains fixed. This means that there is a redistribution of physicians' services. Some are getting less service in order for those whose service was to be enhanced to get more.

In the above diagrams the quantity of physicians' services supplied is shown as beting fixed. That is true only down to some rate of pay at which physicians begin to decline work. Generally the supply curve can be more complex than just a fixed quantity.

Backward Bending Supply Curves

When the price of physicians' services rises it is entirely possible that some physicians will work fewer hours per week and/or take more vacations. It is completely rational for professionals to take the benefit of a higher rate of pay in terms of more leisure time.

If there is a reduction in the quantity supplied as a result of a higher rate of pay for physicians' services then those who are getting increased physicians' services do so at the expense of those who demand less at the higher price. But the reduction in physicians' services to those who get less is greater than the increase to those who get more.


As long as the supply of physicians' services is artifically restricted due to the medical cartel, programs to enhance the receipt of physicians' services for some only results in the diminishment of physicians' services for others with no net gain for the population as a whole. With the cartel operating and physicians taking the benefit of higher pay in the form of more leisure time, such programs will make the general public worse off. There is no way to improve overall conditions as long as the cartel is in operation.

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