Supply Bottlenecks and Health Care

My colleague here at Outside The Beltway, Dave Schuler, has often commented that one of the problems with health care are supply bottlenecks that drive up prices. This article on the shortage of nurses in Michigan suggests that Dave is right on target.

Michigan’s 53 nursing schools reportedly are turning away about half of their applicants due to faculty and money shortages. The money and staff problems only add to the looming overall nurse shortage experts say is looming within the next few years, The Detroit News reported Monday.

Nursing school applications in Michigan have risen to about 16,000 in the past three years, but there are only enough facilities for roughly half of them.

[…]

[S]tate officials are worried about the shortage of 18,000 nurses predicted by 2015.

“If you’re short 18,000, that’s an absolute crisis,” said Jeanette Klemczak, the state’s first chief nurse executive. “If we don’t have those nurses, we’re going be in a dire situation. We’ll find ourselves with closed operating rooms and less hospital beds available to patients. It will slow down the whole delivery of the health care process.”

But is this a problem nationwide? The answer is obviously Yes. If other states and the colleges/universities in those states were graduating plenty of nurses, then the increased wages in Michigan would lure nurses to Michigan, thus solving the problem of the shortage. For further evidence there is also this article:

The problem is nationwide, but the crunch is acute in Metro Detroit. Wayne County Community College has 933 students on waiting lists, while Oakland Community College turned away 300. At Henry Ford Community College, 7,000 students list nursing as majors but the school can only admit 340 per year.

Sarah Nolff, 25, of Monroe said she waited two years before winning a spot last fall at Henry Ford. Like many students, she was attracted by the jobs that pay an average $60,000 a year in southeast Michigan and offer good benefits, flexible hours — and security because of the anticipated shortage.

[…]

Nationwide, shortages of 400,000 and up to as many as 1 million nurses are forecast by 2020, mainly because aging baby boomers are expected to place unprecedented stress on the nation’s health care system at the very time when many nurses plan to retire, according to a recent PriceWaterhouseCoopers report.

What a great way to apply some basic economic theory.

What do we have here? A shortage. So hospitals and other employers of nurses are offering $60,000/year, which in Michigan is quite a bit of money. So, on the demand side we have lots of people applying to nursing programs to get in on this good money. Problem is that the nursing schools are limited in terms of space, so many of the applicants are either rejected or wait listed. So why aren’t there new nursing schools being built and existing programs being expanded? Beats me, but I’d be willing to guess that there are a couple of organizations hard at work to prevent these things. After all, if you can block entry into the market, as well as expansion by existing market participants, you can reduce supply and basic supply and demand theory tells us that in this case prices will increase to clear markets. Basically, I wouldn’t be at all surprised to find out that there is some good old fashioned rent seeking going on here.

As for the claims about schools not having money, frankly I don’t see the problem here, unless it is perhaps an institutional block. Why not raise the tuition for nursing programs? After all, the money, if you graduate as a trained nurse, is pretty good. So increase the tuition and people should still be willing to pony up the money. Then use the money to expand the nursing program.

What does this mean for health care in general? Higher costs, which means higher employer costs for benefits which will almost surely translate into less benefits and lower wages. Basically a wealth transfer from those who are not in nursing to those who are in nursing.

FILED UNDER: Economics and Business, Health,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. markm says:

    “As for the claims about schools not having money, frankly I don’t see the problem here, unless it is perhaps an institutional block. Why not raise the tuition for nursing programs?”

    I don’t know if the schools get state funding (but they probably do) but most colleges in this state have raised tuition substantially as things are not good here economically.

  2. yetanotherjohn says:

    My father was recently in the hospital for a couple of weeks (he’s out and doing much better now, thank you). On a hall wall they had one of those diversity inspired posters. This was a world map showing where all the nurses for the intermediace care unit came from. 80% showed their origin as being outside of the US. The Phillipines was one of the larger contingents.

    So at least in that hospital in Texas, there was a global insourcing of service providers into the US.

  3. Steve Verdon says:

    Yeah, but we can’t let these people in, they are taking jobs from Americans, and damn good paying ones at that. Funny how these things come back, aren’t they.

  4. Michael says:

    Yeah, but we can’t let these people in, they are taking jobs from Americans, and damn good paying ones at that. Funny how these things come back, aren’t they.

    It’s ok, he said they’re from the Phillipines, not Mexico.

  5. yetanotherjohn says:

    While I didn’t check immigration papers, I really don’t think they were here illegally. I suspect most of them had a temporary work visa. Maybe they have or are on their way to citizenship.

    At least in my book, there is a huge difference in legal vs illegal immigration. Legal immigration to bring nurses into the US to fill a shortage is a good thing. And it would seem that this is just what the global market is doing.

  6. Dave Schuler says:

    Quite some number of nursing schools have opened recently in the Philippines specifically designed for the export market. Here in the States, lots of nursing schools have waiting lists.

  7. orman says:

    An interesting post. Just as interesting would be information about how the capacity of nursing schools has declined over the years. My impression is that for reasons unknown, many major hospitals have discontinued nurse training programs. I wonder what the economics of that is.

  8. Steve Verdon says:

    While I didn’t check immigration papers, I really don’t think they were here illegally.

    Yes, but they are taking jobs from Americans and well paying ones at that. Frankly, if you wanted to say, look we don’t need to allow immigration of trained nurses because we have plenty of people here in this country willing to become nurses you’d actually have a strong case. Now, suddenly immigration is okay? I’m thinking there is a huge consistency problem here.

    At least in my book, there is a huge difference in legal vs illegal immigration.

    Really? Why? Most of the arguments boil down to economic ones. Now you have a clear cut case that can go your way, but now you flip sides.

    And it would seem that this is just what the global market is doing.

    Why should there be a global market for nurses, but not unskilled labor?