Friday, August 28, 2009

Physician pay

Source: Greg Mankiw

Physicians in the U.S. get paid a lot of money. I imagine most people don't have a problem with this. These are individuals, after all, who can literally bring you back from the brink of death. Nevertheless, their pay is certainly anomalous when compared to their colleagues in other countries. There would seem to be at least three possible explanations for this:
  • Physician pay in the U.S. is artificially high.
  • Physician pay in the rest of the world is artificially low.
  • Physicians in the U.S. are much more productive than their international colleagues.
It may very well that the explanation is a combination of all three factors, especially given that the other countries do not have free markets in health care (governments set, or heavily influence, prices including doctor pay) and tend to have more vacation time (less productivity). That said, I suspect there is reason to think physician pay in the U.S. is higher than what it would otherwise be with a fully competitive market.

According to Reason, physicians' high wages can be explained in large part by the influence of the American Medical Association and what the magazine refers to as "Big Medicine":
According to a 2007 study by McKinsey&Company, physician compensation bumps up health care spending in America by $58 billion annually,on average, because U.S. doctors make twice as much as their OECD peers. And even the poorest in specializations like radiology and surgery routinely rake in around $400,000 annually.

...Meanwhile, other studies have found that doctors' salaries contribute more to soaring medical costs than the $40 billion or so that the uninsured cost in uncompensated care--the president's bete noir.

But how has the AMA managed to get away with such princely remuneration that ordinary mortals in other professions—even ones such as law and engineering that also require arduous training—can only dream of? After all, in a functioning market, a profession offering such handsome returns would become a magnet for more people who, over time, would bid down "excess" wages.

But that's
not how it has worked in medicine since 1910 when the Flexner report, commissioned by the AMA, declared that a surplus of substandard medical schools in the country were producing a surplus of substandard doctors. The AMA convinced lawmakers to shut down "deficient" medical schools, drastically paring back the supply of doctors almost 30 percent over 30 years. Few new medical schools have been allowed to open since the 1980s.

Still, the AMA along with other industry organizations until recently had issued dire warnings of an impending physician "glut" (whatever that means beyond depressing member wages), even convincing Congress to limit the number of residencies it funds to about 100,000 a year. This imposes a de facto cap on new doctors every year given that without completing their residencies from accredited medical schools, physicians cannot obtain a license to legally practice medicine in the U.S. Even foreign doctors with years of experience in their home countries have to redo their residencies—along with taking a slew of exams—before they are allowed to practice here.

The upshot of all this is that now the country is facing an acute
shortage of doctors that even the AMA and its sister organizations cannot deny anymore. Indeed, the Association of American Medical Colleges, a private nonprofit industry advisory group whose forecasts effectively determine how many new doctors will be allowed at any given time, reversed itself in 2002 issuing this belated apology: "It now appears that those predictions [of a glut] may be in error."
Essentially, at least partly due to the AMA's influence, an artificial restriction is placed on the supply of new doctors, pushing up the wages of existing ones. Artificial limits on the supply of doctors isn't a new phenomenon, with Americans wishing to become doctors heading abroad for many years to obtain a medical education given limited options at home. As this USA Today story says:
The marketplace doesn't determine how many doctors the nation has, as it does for engineers, pilots and other professions. The number of doctors is a political decision, heavily influenced by doctors themselves.
Indeed, digging around I found out about the existence of a government organization called the Council on Graduate Medical Education. Here is the purpose of the group as stated in its charter:
The Secretary is charged under Title VII of the Public Health Service Act with responsibility for taking national leadership in the development of programs addressed to graduate medical education and in the research, development, and analysis of programs that impact on the health manpower needs of this Nation. Part E of Title VII establishes this Council, and charges it with assessing physician workforce needs on a long term basis, recommending appropriate Federal and private sector efforts necessary to address these needs, and providing a forum to enable appropriate consideration of these needs.
Given that the existence of such a group tasked with "assessing physician workforce needs on a long term basis" the projected surplus of doctors turned into a deficit is not at all surprising. After all, central planning didn't work out too well for the Soviets either. I'm pretty sure if we relied on a government body to assess the workforce needs of auto mechanics and software developers supply problems would exist there as well.

I also looked a bit more in depth into the Flexner report cited by the Reason article, which I had also seen referenced elsewhere. At its most basic the report is, as described by wikipedia, a "book-length study of medical education in the United States and Canada" that was published in 1910. While aimed at improving the state of medical education, wikipedia argues that it also had a number of other consequences. Among them:
  • No medical school can be created without the permission of the state government. Likewise, the size of existing medical schools is subject to state regulation
  • Each state branch of the American Medical Association has oversight over the conventional medical schools located within the state
  • The annual number of medical school graduates sharply declined, and the resulting reduction in the supply of doctors makes the availability and affordability of medical care problematic. The Report led to the closure of the sort of medical schools that trained doctors willing to charge their patients less. Moreover, before the Report, high quality doctors varied their fees according to what they believed their patients could afford, a practice known as price discrimination. The extent of price discrimination in American medicine declined in the aftermath of the Report
  • Kessel (1958) argued that the Flexner Report in effect began the cartelization of the American medical profession, a cartelization enforced by the American Medical Association and backed by the police power of each American state. This de facto cartel restricted the supply of physicians, and raised the incomes of the remaining practitioners.
While by no means a comprehensive explanation, it would seem that both physician pay and a projected shortage in the profession can be traced in large part to government regulations. If we want to reduce costs, a rethink of some of these rules would seem to be in order so that the supply of doctors could be expanded. But then again, such boat rocking would upset a lot of people - i.e. special interests -- and we shouldn't be surprised that nothing of the sort is currently on the table in the health care reform debate.


vince said...

vince's health care plan = drink and let the chips fall where they may

Ian said...

Total physician "excess pay" in the US according to the McKinsey study you cite: $58 billion.

Total US health care expenditure: $2.2 trillion (rounded from $2.241 trillion).

Eliminate all "excess pay" for physicians, accepting all the negative repercussions for patient care that this would entail; resultant total US health care expenditure: $2.2 trillion (rounded from $2.183 trillion).

Physician pay is a rounding error in the morass of US health care expenditure. If you really think cutting physician remuneration would do anything to fix the overall problem, I suggest you find some less rigorous means of exercising your intellect.

Colin said...


You seem to be arguing with a strawman. I never said that physician costs were a significant driver of health care costs. But $58 billion is hardly chump change. It comes out to about $190 for every man, woman and child in the country, or $950 for a two parent family with 3 kids.

In fact, for you to scoff at $58 billion as somehow trivial makes me wonder if you are a member of Congress.

Colin said...

Further, let me point out that the $58 billion figure should not be compared with $2.2 trillion, but rather waste and inefficiency in the system, as not all health care dollars are wasted. If we assume that 25% of all health care dollars are wasted then that is $560 billion, of which $58 billion is 10%. If waste is lower, say $400 billion, then the $58 billion figure looms even larger.

Your contention that physician pay is a minor issue simply doesn't square with the facts.