31 May 2017
Do doctors deserve to get paid so much?
Are Doctors Overpaid?
May 30, 2017
With the ongoing death spiral of Obamacare, there is discussion of how to shift the insurance costs for people with pre-existing conditions onto others, contain drug costs, and force insurance companies to let parents keep their adult children on their insurance. There is surprisingly little discussion of physician compensation. This is surprising given that, as Catherine Rampell writing in The New York Times points out, such compensation constitutes 20% of total healthcare costs.
Physicians are well compensated (compensation includes salary, bonus, and profit-sharing). According to a 2016 Medscape study, male primary care physicians, on average make $225,000 and specialists $324,000. I focus on males because 25% of female physicians only work part-time. Using 2009 figures, over their lifetime, primary care physicians (men and women) earn $6.5 million and specialists earn $10 million (this is after and deductible business expenses and taxes, except income taxes,). Writing in The Atlantic, James Hamblin notes that, on average, a number of specialties make $400,000 or more (cardiologist, dermatologist, radiation oncologist, and various types of surgeons: radiologist, neurosurgeon, orthopedic surgeon, plastic surgeon, thoracic surgeon, and vascular surgeon).
Writing in Forbes, Chris Conover points out that physician compensation is 78% higher than that of other industrialized countries, although this might be more like 35% for specialists once we control for relevant factors.
These high salaries are the result of restricted supply of doctors rather than the free market. Princeton economist Uwe Reinhardt raises the idea that many more people want to become doctors than are admitted into medical schools. This is done by limiting medical school places and residency slots. The result is to limit the number of doctors and thereby raise their prices.
Writing in Reason, Shikha Dalmia argues that the American Medical Association convinced Congress to limit the number of residencies, thereby restricting the number of physicians. She further notes that even foreign doctors with years of experience in their home country have to redo their residencies. Again, this limits the number of doctors. These things have produced an acute doctor shortage in the U.S.
The return on investment in medical training is high. Physicians invest a lot of money in order to be able to practice. They go into pay a lot for and go into debt to pay for medical school (on average, $170-$200,000 debt), forego income while in medical school, and get reduced pay during residency. Still, one study showed that only four professions had a higher return on investment than medical specialists (for example, pharmacists and chemical/petroleum/nuclear engineers) and primary care physicians did nearly as well. Another study by Berkeley economist Nicholas Roth found a high rate of return on medical training, well above that of stocks and treasury bonds.
One objection raised by the father of modern economics, Adam Smith, is that doctors are very important to our health, a crucial aspect of how well our lives go. We trust them with our lives. To ensure that only the most talented and trustworthy people go into medicine, doctors need to be highly compensated.
The problem with this objection is that even if ratcheting up their compensation and prestige produces better physicians, doing so by limiting their numbers results in fewer physicians and less access to them. Fewer people get healthcare because of the increased cost caused by a shortage of doctors. Increasingly, care is given by healthcare workers who do most, but not all, of what a physician does at lower salaries: nurse-practitioners and physician’s assistants. It is not clear that the American people are better off with fewer but better physicians.
Writing in USA Today, Kevin Pho points that the talent pool that produces doctors also produces other high earners, such as business executives, lawyers, and corporate executives. A second objection is that some of these other professions get more money (or, at least, get similar money with far less investment in education and training) and it is necessary to pay doctors well in order to attract top talent away from these other fields and into medicine.
The difficulty with this objection is that it is unclear whether it is efficient to have the best and brightest go into medicine rather than being investors or business executives. This is not the sort of thing that can be determined by legislators, bureaucrats, or gatekeeper to the medical field. Rather it is best determined by the market. The market can compare the cost and benefit of funneling the best and brightest in one field rather than another by seeing the profits generated by paying for the very best as opposed to those who are merely very good. The idea that physicians need to be as good as investors needs support, not emotion.
In addition, people who do most of what doctors do (nurse-practitioners and physician’s assistants) and physicians who lack a MD (specifically, DOs) are increasingly common in medicine. The former group have less training than MDs and the latter have noticeably lower medical board scores. This suggest that the market does not think all medical personnel need such talent.
A third objection is that physicians are among the best and brightest in our country and so should receive a lot of money for what they do. They have high IQs, go through demanding and lengthy training, pay astronomical sums to medical schools, and are among the most trusted professions (ranking only below nurses and pharmacists). They’re impressive.
This objection is bizarre. Just because physicians are talented, sacrifice a lot, and are trusted does not mean that they should make so much more money than others, especially when this amount would not be paid out by the free market. Farmers keep us alive, loggers and fishermen have dangerous jobs, physicists are incredibly bright, and investors (for example, hedge fund managers) direct large amounts of resources toward their most efficient use. It doesn’t follow from these facts that they should get rich. The same is true for physicians.