Arnold Kling  

Physician Pay

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Alex Berenson thinks that he has gotten to the crux of America's health care spending problem.


the partisan fight over insurers and drug makers is a distraction from a bigger problem: the relatively high salaries paid to American doctors, and even more importantly, the way they are compensated.

Berenson notes that American doctors earn more than doctors in other countries. However, average incomes in general (for non-doctors) are higher in the U.S. Also, doctors tend to work more hours in the U.S., and we tend to have more specialists. Adjusting for these factors, the "excess pay" of U.S. doctors is probably not enough to account for more than a small portion of our higher medical spending.

Berenson points out that fee-for-service medicine creates an incentive for doctors to offer more procedures. However, there is no perfect compensation scheme. Other approaches, such as fixed-salary systems or compensation tied to outcomes, reduce the incentive for doctors to deal with sick patients.

The biggest incentive problem in health care is the insulation from costs under comprehensive health insurance. Without changing that, it is almost impossible to reduce spending on physicians. My expectation is that under a government-run health system in the U.S., doctors would be even more powerful than they are today.


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COMMENTS (13 to date)
spencer writes:

Doctors pay accounts for well under 10% of total medical expenditures.

So if we cut doctors pay in half it would offset about one year of the increase in medical expenditures.

The problem is much more complex than simple points like this.

Floccina writes:

When I had a $5,000 decuctible and an additial $5,000 out of pocket copay I often had doctors say, oh you are paying for this, here is a cheaper option.

Arnold Kling writes:

Spencer, where do you get your figures that doctor's pay is less than 10 percent of total medical spending?

According to the tables here, "physician and clinical services" in 2005 were $421 billion, out of total national health spending of $1988 billion.

spencer writes:

I took the number of practicing doctors as reported by the AMA and multiplied it by the average income of doctors -- plus an additional factor for fringe benefits -- and divided it by total healthcare spending.

Several months ago when Marginal Revolution was comparing the French system to the US system was when I did these calculations. At that time Mark Thoma came to the same conclusion based on a different set of calculations. I did not keep his calculations, but you can probably easily access it.

spencer writes:

The table you are reporting is payments for doctors services. But that is a very different number than doctors salaries. When you visit a doctors office and pay $x for doctors services you are paying all the expenses associated with maintaining his/her office including overhead and the salaries of his nurses and other people employed by the doctors office. Only a small percentage of that payment for doctors services goes to the doctors salary.

Boonton writes:

spencer,

"Doctors services" could be part of the problem, though. When you have a bunch of salaried doctors you can probably dramatically cut administrative expenses. You can put them all in one big building rather than every one having an office that takes up a small house's worth of space. Several nurses can cover a dozen doctors rather than one nurse covering one or two doctors. Instead of a harried 'office manager' doing bookkeeping, IT, building services etc. you can have dedicated support teams like you would in an office.

Essentially that's savings based on economies of scale. That's why it's cheaper to shop at Staples rather than going to 'The Paperclip store', then 'The ink store', then 'The folder store' etc. With salaried docs you could create Wal-Marts of medical care. Will they meet everyone's needs? No. But many people don't need the best doctor in the world, they just need a decent doctor who can handle routine medical problems and exams.

Getting paid per service encourages every doctor to open up his own little 'kingdom' which probably drives some of those expenses.

Still I think you have a point. Using Arnold's numbers 'doctor services' still only accounts for 21% of health spending. If you somehow found 20% savings through 'smarter shopping' you're still only cutting overall health spending by 4.2%. Again not even a year's worth of increase.

Doctors probably drive other types of costs, though. If your doctor has you spend three days in the hospital the cost for his three visits or whatever will probably be small compared to the many thousands the hospital will charge you. Yet this hospital expense will show up not in the $421b but in the remaining portion of the $1988b. Yet the doctor generated the hospital charge! If it was unnecessary it still contributes to waste.

FC writes:

I've found the crux of America's newspaper spending problem: journalists' pay.

I am one of the millions of Americans who can't afford to buy the New York Times at $1.25 six days a week and $3.50 Sundays. Those greedy journalists claim to be public servants but they're getting rich on the sweat of the proletariat!

I demand single-payer newspaper insurance now!

Mark Seecof writes:

Pundits who want to cut doctors' pay never adduce any credible reasons for their proposal. I wonder whether they suffer from some irrational fear of physicians-- were they sick children who now shudder every time they have to visit a doctor's office? As previous commenters have shown, even drastic cuts in doctors' pay would shave only tiny amounts off total health spending.

Look, we are all better off with smart doctors. Smart doctors make better diagnoses and better treatment decisions. To recruit smart people into the prolonged and difficult training regime for physicians we need to offer them high pay and prestige after they graduate.

We have already cut doctors' pay, working conditions, and prestige a lot in this country. That has had a visibly depressing effect on the quality and quantity of applicants to medical school. The smartest applicants are now first-generation children of immigrants whose parents "haven't gotten the message." Really smart American kids with non-immigrant parents head for B-school now; only the second or third tier for brains consider medical school. (Take a gander at this 2001 speech by the President of the Association of American Medical Colleges. He pointed out that med schools no longer attract top applicants because society has been beating working doctors into the ground. Then he suggested several ways to reduce admission standards to keep the pipeline full).

Look at other "western democracies" where governments have forced down physician pay. They're so hard up for qualified medical students that they must recruit doctors from third-world countries, some of whom turn out to be terrorists!

Boonton writes:

Look at other "western democracies" where governments have forced down physician pay. They're so hard up for qualified medical students that they must recruit doctors from third-world countries, some of whom turn out to be terrorists!

Bit over the top here aren't we? Why are we recruiting qualified computer programmers, even (heavens forbid!) B-school grads from developing countries?

No matter how you cut it there are incentive problems. If a doc gets paid by the service he has an incentive to load up on procedures. If a doc gets paid a salary he has an incentive to slack off and not treat sick people who may be 'hard work'.

But 'fee for service' has been the way most docs are paid. If there's an imbalance it probably is towards overpaying physicians and perhaps physicians feel like they are getting overworked because they are trying to play two roles at once...one as doctor and one as small business enterprise owner overseeing a small army of staff.

I suspec there is room to bring the whole operation in house. Why not have HMO's create their own doctor's offices where the docs will work for salary and members can see them whenever they want for minimal fees? The HMO's could structure salaries and bonuses to reward docs for managing patients overall health rather than just paying them for visits.

Tim Worstall writes:

The basic fact is wrong. The UK has the NHS: doctors in that make at or above US doctors' incomes. GP (general practice) currently averages £100,000 a year ($210,000 or so) as against the $200,000 in the US.

spencer writes:

The average income of doctors is on the orders of $200,00 per year. That is about the same that the manager of your local Wal Mart store makes.

Now, which one is being over/under paid?

Kimmitt writes:

Tim Worstall -- Does that take into account Purchasing Power Parity? The dollar is unusually weak internationally at the moment, so that would cause a meaningless inflation of British doctor salaries.

Not that I disagree with the main point, which is that the salaries are comparable.

Larry writes:

French GPs make about 25% of US GPs. At the same time, US specialists can make 3x+ what US GPs make. Thus we have a relative shortage of GPs and surplus of specialists, made worse because doctors like to live in blue states.

We need more doctors, which means a different financing approach, because student debt is a big reason people don't try to become doctors. Increasing the supply would also mean that we can improve quality of life for doctors, another off-putting part of that profession.

The big flaw in Thoma's argument is that he treats costs as an exogenous variable that are unaffected by the structure of the health care system, especially how we finance it.

BTW, the alternative that I like best is to eliminate the concept of a fixed retirement age. Instead, we should give workers an incentive to stay in the labor force by increasing their benefits the longer they do so. On average, that keeps them healthier (working is good for you), raises their living standards, and significantly reduces their benefits footprint.

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