The Pay of Doctors in America

The article by the economist Dean Baker illustrates why doctors in the U.S. have such high incomes. Directly, it’s basically because limits are imposed on foreign and domestic competition by restricting professional medical practice to those who have completed U.S. residency programs that are too limited in providing opportunities.

It’s $100 billion ($700 per U.S. family) a year in added costs to pay doctors as much as the U.S. does, but in a more ideal world, in world history’s richest country, good doctors could be permitted to make that much money. If the U.S. cut costs in substantial ways — such as switching to single-payer, saving $500 billion from only that annually — I wouldn’t have an issue with doctors making over 200k annually. I’d want a subsidy that allows doctors to earn that much income, however, rather than them earning it through a rigged market structure. That’s my view of the article and possibly the only major point expressed in it that I seem to disagree with the economist on.

Rx-Rolls-Royce

The United States pays more than twice as much per person for health care as other wealthy countries. We tend to blame the high prices on things like drugs and medical equipment, in part because the price tag for many life-saving drugs is less than half the U.S. price in Canada or Europe.

But an unavoidable part of the high cost of U.S. health care is how much we pay doctors — twice as much on average as physicians in other wealthy countries. Because our doctors are paid, on average, more than $250,000 a year (even after malpractice insurance and other expenses), and more than 900,000 doctors in the country, that means we pay an extra $100 billion a year in doctor salaries. That works out to more than $700 per U.S. household per year. We can think of this as a kind of doctors’ tax.

Doctors and other highly paid professionals stand out in this respect. Our autoworkers and retail clerks do not in general earn more than their counterparts in other wealthy countries.

Most Americans are likely to be sympathetic to the idea that doctors should be well paid. After all, it takes many years of education and training, including long hours as an intern and resident, to become a doctor. And people generally respect and trust their doctors. But they likely don’t realize how out of line our doctors’ pay is with doctors in other wealthy countries.

However, as an economist, I look for structural explanations for pay disparities like this. And when economists like me look at medicine in America – whether we lean left or right politically – we see something that looks an awful lot like a cartel.

The word “cartel” has some bad connotations; most people’s thoughts probably jump to OPEC and the 1970s crisis caused by its reduction in the supply of oil. But a cartel is not necessarily completely negative. It means that the suppliers of a good or service have control over the supply. This control can be used to ensure quality, as is the case with many agricultural cartels around the world. However, controlling supply also lets the cartel exert some control over price.

In the United States, the supply of doctors is tightly controlled by the number of medical school slots, and more importantly, the number of medical residencies. Those are both set by the Accreditation Council for Graduate Medical Education, a body dominated by physicians’ organizations. The United States, unlike other countries, requires physicians to complete a U.S. residency program to practice. (Since 2011, graduates of Canadian programs have also been allowed to practice in the U.S., although there are still substantial obstacles.) This means that U.S. doctors get to legally limit their competition. As a result, U.S. doctors receive higher pay, and like anyone in a position to exploit a cartel, they also get patients to buy services (i.e., from specialists) that they don’t really need.

There are two parts to the high pay received by our doctors relative to doctors elsewhere, both connected to the same cause. The first is that our doctors get higher pay in every category of medical practice, including general practitioner. If we compare our cardiologists to cardiologists in Europe or Canada, our heart doctors earn a substantial premium. The same is true of our neurologists, surgeons, and every other category of medical specialization. Even family practitioners clock in as earning more than $200,000 a year, enough to put them at the edge of the top 1 percent of wage earners in the country.

The other reason that our physicians earn so much more is that roughly two-thirds are specialists. This contrasts with the situation in other countries, where roughly two-thirds of doctors are general practitioners. This means we are paying specialists’ wages for many tasks that elsewhere are performed by general practitioners. Since there is little evidence of systematically better outcomes in the United States, the increased use of specialists does not appear to be driven by medical necessity.

In recent years, the number of medical residents has become so restricted that even the American Medical Association is pushing to have the number of slots increased. The major obstacle at this point is funding. It costs a teaching hospital roughly $150,000 a year for a residency slot. Most of the money comes from Medicare, with a lesser amount from Medicaid and other government sources. The number of slots supported by Medicare has been frozen for two decades after Congress lowered it in 1997 at the request of the American Medical Association and other doctors’ organizations.

Furthermore, Medicare exerts little control over the fields of specialization in the residency slots it supports, largely leaving this up to the teaching hospitals, which have an incentive to offer residencies in specialties from which they can get the most revenue per resident. This means they are more likely to train someone in neurology or cardiology than as a family practitioner.

Policymakers have a number of tools to use to introduce more competition, weaken the doctors’ cartel and get their pay more in line with counterparts elsewhere. One would be simply to fund more residency slots. Medicare could also limit the slots for many areas of specialization and instead insist that more of its funding go to train people as family practitioners.

A second route would be to end the requirement that foreign doctors complete a U.S. residency program in order to practice medicine in the United States. This means setting up arrangements through which qualified foreign doctors could be licensed to practice in the United States after completing an equivalent residency program in another country. The admission of many more doctors would put downward pressure on the pay of doctors in the United States, as insurers would have a new pool of physicians to add to their networks who will accept somewhat lower compensation.

Another approach is to not only change the rules around who can practice, but to change the rules around what doctors do. There are many procedures now performed by doctors that can be performed by nurse practitioners and other lower-paid health professionals. For example, many states now allow nurse practitioners to prescribe medicine without the supervision of a doctor, and there is no evidence that this has resulted in worse outcomes for patients. (It does, however, reduce health care costs.) The scope of practice of nurse practitioners and other health professionals can be extended in this and other areas for which they are fully competent. This would both directly save money and further reduce the demand for doctors, putting more downward pressure on their pay.

Yet one more approach is being tested in Missouri: While a doctor can’t practice independently without completing a U.S. residency program, Missouri will now allow foreign-trained doctors to practice under the supervision of a U.S.-trained doctor. This should also help to increase the supply of doctors.