Demand and Supply Drivers of Medicare and Non-Medicare Health Spending: An Analysis of U.S. States, 1991–2019

Abstract

For the last four decades, policymakers have attempted to control the United States's high health care costs by reducing patients’ demand for care (e.g., by imposing managed-care restrictions or high costs on patients at the time of use). Yet studies based mostly on data from the public Medicare program, which covers mostly elderly Americans, suggest that supply (e.g., number of physicians or hospital beds) rather than demand drives aggregate service use and, hence, costs. Using variation between U.S. states in per enrollee Medicare spending versus per capita spending of all other (non-Medicare) individuals, we find that greater supply boosts costs for the entire population. Furthermore, we find that factors that suppress demand in the non-Medicare population do reduce non-Medicare health care spending, but simultaneously increase Medicare spending. This suggests that for a given supply of medical resources, suppressing demand for one group of patients may produce a compensatory increase in provision of care to those whose demand has not been suppressed. Health planning to assure adequate medical resources where they are needed while preventing excess supply where it is duplicative and wasteful is likely a more effective cost control strategy than the imposition of managed-care restrictions or imposing higher costs onto patients seeking care.