Monopsony power's role in chronic U.S. nursing shortages

Health Care Economics

Monopsony power is defined as a situation where there is only a single buyer in the market (Investopedia, 2014). In a monopsony situation, all of the bargaining power rests with the buyer, such that the seller is a price taker, and also a taker on term as well. The buyer therefore pays what it wants, and on whatever terms. A monopsony is an unusual natural market condition. In some situations, monopsony is related to monopoly, a good example being health care in Canada, where the government is the employer. With a government monopoly, there is also only one buyer for health care supplies, and health care labor. Unions can also constitute a monopsony in labor, in situations where non-union workers are prohibited. One must work to the terms that the union has negotiated, or not at all. This paper will look at the nursing shortage in the U.S. To identify if monopsony contributes to this shortage, and if so to what degree.

Supply and Demand

Demand for nurses is driven by the overall demand for health care. At present, demand for health care is growing, because of two external factors. The first is the aging of the population. As people age, they typically need more health care, so the older the population is on average, the greater the demand for health care will be. One article had a bold headline that argued that aging was not driving demand for health care, but the author was conflating health care spending with health care demand (Reinhardt, 2003) -- very sloppy work for something published in a reputable journal. Those are two different things. Whether the revenue is zero dollars or a trillion dollars is irrelevant when considering the demand for nurses. One need not look any further than Canada for a smarter way to think about aging and demand -- take out the revenue part of the equation entirely, and officials are still expecting higher demand as the population ages. The article's title and conclusion are therefore misleading -- aging does drive demand for health care, and American society is aging. Demand for health care metrics include the number of patients, the number of patient visits and the number of patient hours. The latter two in particular affect the demand for nurses.

The other factor driving increased demand for health care is the Affordable Care Act, which has provided more health insurance coverage. With the number of uninsured down 25%, that means there are around 10 million more people with health coverage than there were a year ago (Long et al., 2014). This is an increase in potential demand. If all 10 million were young people, the actual increase in demand might be small, but that assumption likely does not hold in real life, and health care organizations need to increase their capacity in order to prepare for such an influx of new patients. If there was already a shortage of nurses, then the ACA would only exacerbate that problem.

There are two supply drivers for nurses. The most significant supply driver is the number of people who want to work in nursing. The industry needs to pull such workers in. While money is not the only variable, there is little question that nursing can attract more workers if the pay and benefits packages are better. This is because nurses must receive substantial education. Nursing is not a career into which people enter lightly. From a microeconomic perspective, nursing has opportunity cost. The field is attractive because there are a lot of open positions, which means job stability, and in many cases the pay is attractive as well.

For many nurses, presuming that they are rational, nursing is the best-paying job that they could get, so they chose to train to become nurses. The number of available spaces in nursing schools is a constraint on supply. If nursing offers poor value -- if the people thinking about becoming nurses believe that they could make more money elsewhere, then they are likely to pursue that other option. Those who choose to enter nursing are not necessarily doing so out of pure economic rationality, but given the expenses involved in becoming a registered nurse, the ability to make a career out of nursing has to be taken into account. There is a certain degree of socialization, for example, and the role of mentors, peers and role models all contribute to someone's formulation of career expectations and ultimately to the decision to pursue a career in nursing (Price, 2009).

Another supply-demand issue with respect to nursing is regionality. Within the United States, there are no structural barriers to mobility within the profession. A nurse is free to relocate for a position. This has significant implications for the bargaining power of nurses, who can typically choose to follow their job around the country should they so desire. The best combination of wages, benefits and cost of living will all factor into the choice of location. Mobility does have a slight stickiness, however, in that people sometimes have non-economic reasons for living where they do, and the process of moving often comes with costs, not all of which are financial. If a condition of monopsony exists, however, it would be a necessary precondition that a nurse cannot simply relocate to another area to pursue employment.

Elasticity in the Supply of Nurses

Economically, a rational individual will work in the career that offers the best contribution to total net worth. This implies a combination of wages, benefits, taxes and cost of living that puts the person ahead. This also assumes that there is perfect mobility and that nobody would decide to live in a location that offered a lower total contribution to net worth. Under such market conditions, the wages and benefits offered to nurses might vary by state and city, but the total benefit should be roughly the same across the country. The decision of someone to become a nurse would therefore be mainly contingent on the opportunity cost of becoming a nurse. The more nursing pays, the more people will be attracted to nursing as a career, but this of course is relative, which introduces cross-price elasticities as well. These elasticities cut across international borders as well -- there is a fairly high fluidity of nurses around the world. Migration is common. The United States tends to attract foreign nurses on a net basis, the major source countries being Canada and the Philippines (Buchan, Parkin & Sochalski, 2003).

Market Failure

If there is a shortage of nurses, especially chronic disequilibrium, that means that there is market failure. There are a few major sources of market failure, and they all have to be examined. Monopoly and monopsony are two sources of market failure. Another potential source of market failure in nursing is allocative inefficiency. In theory, health care providers should pay at a rate high enough to attract more people into nursing. Health care revenues are growing, and margins should be high enough to pay staff well enough. There is information asymmetry that allows health care providers to charge absurd rates to some payers, but the government is often the largest payer and when dealing with the government, health care providers are price takers. If there is a role for monopsony in the nursing shortage this is it. It is difficult for most health care providers to function without revenues from Medicare and Medicaid, but the government's market dominance and pricing power mean that these revenues are mostly just contribution to fixed costs. For health care providers, profitability depends on exploiting information asymmetry with other payers. This is particularly relevant in light of the monopoly power that pharmaceutical companies and medical equipment suppliers often have on account of their FDA-granted monopoly rights.

So there is market failure in health care. Providers are price takers from their biggest customer, the monopsony that government as payer represents means that providers in many cases do not have the ability to pay full value for some of their costs. Nurses, therefore, often are underpaid, a fact that will in many cases mean that it is more profitable to pursue a different career.

Solutions

If the market for nursing is out of equilibrium, there are other factors. The work done by nurses, for example, is now often being done by other categories of health care worker. Nurse practitioners, nurse aides and other job categories have been introduced, requiring lower levels of training and are being used as substitutes for nursing by many employers. The result is that the bargaining power of nurses is reduced -- their work is simply given to someone else, lowering demand. So one solution is that nurses need to recapture a lot of the work that they once did. Reducing the effect of substitutes is critical to improving wages, and thereby attracting new people into the profession.

Another solution is to import more nurses. The choice to enter nursing reflects opportunity cost. This is not just about wages, but about working conditions. It is possible that upward bound on wage increases is still not sufficient to improve supply. There are many other jobs in the economy, jobs that might be more appealing. On a strictly financial level, nursing may not offer the upward mobility desired by young people, which is why it appeals more to older workers and new immigrants, groups for whom nursing's inherent stability has much more appeal. A younger worker might see nursing as trading security for any genuine opportunity at upward mobility, a trade-off that young people are often unwilling to make.

Other jobs might also have more non-financial utility, for example, and workers might be willing to take less money to work in other fields as a result. This is the case in many professions around the Western world. The solution is typically to import workers, for whom the opportunity cost of remaining in their countries makes coming to the U.S. An easy choice. This is the best solution in the long run, because it recognizes that economic theory based on purely rational models might not work in the nursing market -- the industry might not be able to buy its way out of this problem even if it wanted to, if it relied solely on domestic supply. Nursing would be just another commodity where Americans turned to importing in order to keep cost increases reasonable to meet a chronic shortfall in domestic supply.