Garett Jones  

A Reason U.S. Doctors Earn More Than Europeans: Income Inequality

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Citing an OECD study, Yglesias notes:

...America has the highest-paid general practitioners in the world. 

Why is this?  Presumably American MDs are great at using credentialism to restrict the supply of labor, but there's another possible reason that deserves your attention. 

Really, a combination of two reasons: Higher income productivity inequality in the U.S. plus the Law of One Price (LOOP).  As another OECD study says:

The United States is the country with the highest inequality level...across the OECD, Mexico and Turkey excepted.

In this brief space let me take it for granted that in the U.S., smart people can become pharmaceutical researchers or Wall Street quants or corporate attorneys and earn produce much, much more than they could in Western Europe. If a sharp, disciplined U.S. worker can expect to earn, say, $400K per year by middle age in one of these fields, the LOOP says that a person would have to expect to earn about the same amount as an MD.  For instance, If MDing earned a lot less than pharma research, workers would shift over to pharma until wages (including the value of perks) were equalized across the two lines of work.  So the wages of MDs are pinned down by the wages of comparable workers in other fields.  Pushing down MD incomes means a big exit from MDing.  

Yglesias anticipates this objection to an extent, noting that we can get by with fewer MDs: 

What's more, in the 18 states where lesser-paid nurse practitioners are allowed to do primary care without a doctor's supervision, their treatment is just as good in terms of health outcomes and better in terms of patient satisfaction.

This of course is the long term plan according to some of ACA's architects: "The doctor will see you now" is destined to become an antiquarian expression--instead you should practice saying "The medical care provider will see you now."  Perhaps little will be lost at the general practitioner level given the wastefully Hansonian nature of medicine; it looks like we'll get to find out. 

But my core prediction is a simple, testable one: As long as America has the highest income inequality in the world, as long as highly skilled, detail-oriented, disciplined workers earn vastly more in the U.S. than in the rest of the OECD, America will face a grimmer, crueler tradeoff between doctor wages and doctor quality compared to our friends on the other side of the Atlantic.  The tradeoff will show up in some combination of quantity and quality: fewer doctors and more "doctors" as wages and payments to medical providers are cut over time.  

The best hope for those who want the best possible American doctors in the future?  Lower wages on Wall Street.  

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COMMENTS (29 to date)
roystgnr writes:

I know labor isn't exactly a pure "tradeable", but is it really likely that Czech doctors are unanimously forgoing the opportunity to triple or septuple their salaries because living in the Czech Republic is so vastly preferable to living in the USA?

If not, then we have to ask what else is stopping the marginal most-willing-to-immigrate foreign doctors, and most of the alternatives are right back in that "restrict the supply of labor" category.

John Hall writes:

But it isn't always easy to switch between high-income careers. Sure, a Silicon Valley programmer could become a Wall Street developer and an MD could work on pharma trials, but the MD couldn't become a programmer without a significant amount of training. To obtain that 400k job requires a commitment to a particular set of skills that makes it difficult to switch between industries at that same level. This suggests that there is less competition than you are suggesting.

Mike W writes:

The best hope for those who want the best possible American doctors in the future? Lower wages on Wall Street.

What am I missing? Why wouldn't future Wall Street quants go into pharma research etc. thereby maintaining high earnings for "highly skilled, detail-oriented, disciplined workers"...including MDs? Isn't higher-than-OECD earnings in the US a function of the greater returns available to high quality knowledge workers in our less-restricted free market economy?

Brian writes:

Garett,

So what does this have to do with income inequality itself? Wouldn't what you are describing also happen in a society with low (relative) income inequality but high absolute incomes in other fields? Your point seems to have more to do with the U.S. having high economic diversity, providing earners have many high-income career options.


John Hall,

Presumably, the competition comes from the choice of careers early on, not from doctors dropping out for other jobs in mid-career.

JimS writes:

Roystgnr,
To get a license in America it is almost always necessary to do an American residency program, and few specialty programs will take foreign docs. My wife did her family practice residency alongside a woman who had been a burn specialist in India before immigrating. Many doctors don't want to come to the US badly enough to do a low paid residency program for 3-5 years.

I also wonder if these studies take benefits into account in calculating difference in pay (I don't think they do. ) British GP docs make about 10% less than US FP docs, but can retire at 60 with 60% pay and a £175,000 lump sum payment. I think that makes the British docs better off than the US ones.

Jon writes:

Why do doctors draw from the same top end pool of talent.? Credentials. Only brightest people with high ambition go through the hazing of residency. So yes law of one price, but why that one price? It's the cartel.

That's why NPs are just as effective. The cartel system makes the wrong kinds of people doctors.

Mm writes:

Overlooked is the considerably greater cost of becoming an MD in the US vs the rest of the world. Educational costs are significantly greater here for a 4 yr BA degree and med school. In the UK, for instance, almost nobody pays for their MD degree- there are innumerable scholarships. Once you factor in the costs of education(&interest), forgone wages & low residency pay with long hours, the disparity lessens. In much of the EU college/postgrad subsidies keep people out of the stagnant labor market & becomes a form of unemployment compensation. Look at the recent NYT article about vet schools & the loan burden faced by new grads.

Various writes:

No offense, but your argument doesn't make a lot of sense to me. You might as well say that as long as smart, detailed oriented individuals can make more on Wall Street than pounding nails, they will no longer pound nails. Well guess what, these people don't pound nails in the U.S. today.

The primary problem with healthcare in the U.S. today is that the people who receive care don't usually pay for it. Consequently, there are many perverse incentives that cause providers to basically throw money at the slightest problem, or perceived problem. Utilization is also way higher than it would be if patients paid out of pocket. I think the better analogy is the airline industry. Once deregulation kicked in and the price fixing gravy train left town, the wages of pilots inexorably fell.

Anecdotally, I once became acquainted with one of the sons of Mark DeDomenico, himself the son of the founder of Rice-a-Roni.

I was told that after Mark was a practicing MD, HIS father (my acquaintance's grandfather) called Mark and told him that the family business needed him. So, he gave up the practice of medicine to become CEO of Rice-a-Roni.

Wise choice. I've been to the DeDomenico family palace, it's quite a marvel.

LibIntOrg writes:

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Thomas writes:

Yes. And this is why it matters how we address the issue. If we eliminate (or reduce the effectiveness of) the cartel, by allowing NPs for example, we can see if there's still some value to having talented doctors.

My view is that, in some cases, there is. For many medical issues, I don't need someone who's been to school for years, and for some chronic conditions, I know more than a non-specialist doctor anyway. I'm talking to a professional only because they are a gatekeeper to pharma. We can definitely cut back expense there.

But, sometimes, fortunately not often, I need real expertise. I want someone who doesn't just know what the book says, but who wrote it, and is familiar with the research in the area, and who can really think through a problem. And I'd be willling to pay much, much more for than than for an access-to-pharma visit. (Yet they often cost me the same.)

The Yglesias solution is to use price controls to reduce the cost of both. The right answer, it seems to me, is to let people pay for what they value, without pretending to know what the right value is.

MingoV writes:

There are additional reasons why physicians in the USA make more money than those in other nations.

1. The total training period for physicians is longer in the USA than almost anywhere else. High pay later on makes up for lost earning years.

2. Almost all physicians paid for their college and medical school costs, and most had to borrow money. Many other countries fund physician education. High pay later on repays the education and loan interest costs.

3. Most physicians go into private practice and run the risk of not succeeding. Those who succeed get rewarded for taking the risk, just like any other entrepreneur.

4. Most physicians in the USA work more hours per week than physicians in many other countries.

5. The USA has more medical technologies, imaging technologies, lab tests, and drugs than any other nation. Knowing how and when to use these resources requires lots of work and continuing education. Physicians deserve compensation for acquiring and maintaining those skills.

Steve Sailer writes:

I largely don't buy this argument. I doubt if even 10% of the people who become doctors seriously considered a career on Wall Street. For most Americans, the notion of becoming a Wall Street guy is like becoming a Formula 1 race car driver: sounds cool, but it's not really on the radar. No, for most Americans, the traditional ambitions are "doctor or lawyer." So, the reasonable comparison of doctors' compensation is lawyers' compensation.

Steve Sailer writes:

My impression is that a handful of lawyers are paid like Wall Street guys, and sometimes they go back and forth between law and finance (e.g., Robert Rubin), but for the great majority of lawyers, the vast pay of Wall Street is an irrelevancy. My guess is that an order of magnitude more lawyers than doctors become financiers, so your explanation should work better for lawyers than doctors, yet the median lawyer's compensation isn't astronomical by any means.

Steve Sailer writes:

"Pushing down MD incomes means a big exit from MDing."

How much evidence is there for that? I'm having a hard time coming up with even anecdotal examples in support of that.

My impression is that most people who are doctors decided on that in their teenage years out of some combination of

- Being familiar with the field from visiting doctors
- Wanting to Help People
- Societal respect
- Awareness that doctors are prosperous
- Family tradition

Doug writes:

As a "Wall Street quant" I agree with Steve here. The level of intelligence among most Wall Street quants is way above the typical doctor, particularly general practitioner. Certain competitive specialties might get close, but those who funnel into GP are at the bottom rung of their med school class.

In contrast it's very typical for Wall Street quants to be International Math Olympiad competitors, Intel Science Fair winners, Putnam winners, top-tier university PhD physicists, and world-class open source developers.

There are probably fewer then 10,000 individuals on a high-paying Wall Street career track. The wide majority of the employees at bulge-bracket banks are in back-office middle class clerical positions. And hedge funds simply employ very few people. In contrast there's nearly a million doctors in the US.

egd writes:

The problem isn't that Wall Street is overpaid, the problem is that Wall Street is overpaid compared to physicians.

Which profession - Physicians or Wall Street Bankers - is less regulated and paid closer to their true market value?

To echo some of the comments above, the premise here is that the cohort of [people who have the potential to become doctors] is somehow coincident with the cohort of [people who have the potential to become 'Wall Street quants'], and that's why their salaries can/should be comparable.

Having worked closely with both types of people, and not to somehow unduly praise 'Wall Street quants', but I don't agree with this premise. The perception that it is true, of course, helps inflate doctor compensation.

Mark V Anderson writes:

I don't buy Garett's argument at all. The theory that fewer people will become doctors if it paid less assumes that the number of doctors is based on supply and demand right now. The number of doctors is artificially limited by the number of accredited schools the AMA allows to exist. If doctors made less, there might be fewer applicants to medical school, but just as many would attend school and become doctors.

Unfortunately, the same limit also applies to nurse practitioners. There is just ONE such program in the Minneapolis / St Paul area for master's degrees NPs. I found this out when my wife applied for a spot in the single program, and found out that the competition was overwhelming. They do have a couple of doctorate NP programs here, but heck, if you are willing to spend that much time in school, why not become an MD?

Steve Sailer writes:

Fifty years ago, Milton Friedman wrote about how the number of spots in medical schools are more restricted than the number of spots in law schools. His theory was that more lawyers made more work for each other, so the legal profession was less restrictive than the medical profession.

AMac writes:

Garrett wrote,

If a sharp, disciplined U.S. worker can expect to earn, say, $400K per year by middle age in one of these fields [pharma researcher/Wall Street quant/corporate attorney] the LOOP says that a person would have to expect to earn about the same amount as an MD. For instance, If MDing earned a lot less than pharma research, workers would shift over to pharma until wages... were equalized across the two lines of work.
I assume Garrett picked $400k/yr out of a hat, but let's go with it.

Doug said (2/27/13 8:52pm) that there are about a million doctors in the US, cf. fewer than 10,000 individuals on a high-paying Wall Street career track.

My guess (biology PhD) is that it's about the same in pharma/biotech research. How many bench scientists ("sharp, disciplined US workers") have a $400k-plus salary? My SWAG is "scores to a few hundred." Include research management, and you probably raise the tally to a few thousand people, nationwide.

For the typical clinician, such a switch would require stopping mid-career to undertake years of training. And I suspect that most median-earning physicians would flounder in either of these specialized, demanding roles. (Oh, and they'd be introduced to chronic concerns about downsizing and outsourcing...)

LOOP seems to be a superficially attractive explanation that doesn't withstand much scrutiny.

Shayne Cook writes:

@ Garrett:

There is one significant difference between the financial services industry and the health care delivery industry in the U.S., that you haven't accounted for.

Specifically, the health care delivery industry operates under a system of guaranteed payment for delivery of services. That, completely irrespective of whether those services are effective, necessary, or even relevant. They "treat" you, they get paid - period. They get paid for "treating" you even if their "treatment" kills you.

There are certainly distortions and exorbitant compensations in the U.S. financial sector, but even the "quants" and most highly compensated are NOT guaranteed payment for their services.

And the 2008 Bailout Bill notwithstanding, there is no law that compels me personally to purchase Wall Street services - at their dictated prices - as there is in the Obamacare measure.

Silas Barta writes:
And the 2008 Bailout Bill notwithstanding, there is no law that compels me personally to purchase Wall Street services - at their dictated prices - as there is in the Obamacare measure.

Perhaps not, but there are several laws that are close enough. For example, preferential IRA tax treatment (incl 401ks, Roths) and pension fund laws require that they only buy (or have at least x%) in Wall-Street-vetted securities. This effectively inflates the demand for services from people in a field whose entry is restricted.

Anyone investing through the "normal channels" is thus paying a huge hidden tax to Wall Street. Sure, you can avoid it through things like P2P lending and such, but it's hard. And in a lot of cases, they will outright prohibit your investment in certain ventures if you're not a qualified (i.e. rich) investor.

MingoV writes:

Mark Anderson wrote: "The number of doctors is artificially limited by the number of accredited schools the AMA allows to exist."

I am very tired of reading that completely false statement. The AMA has nothing to do with medical school formation or accreditation. It is a professional and lobbying organization comprised of practicing physicians.

Medical school formation is controlled by the federal government via the power of the purse. All medical schools receive substantial funding from the government. The federal government has blocked new med school formation by stating that any new schools will get no federal funding. Without federal funding, a new school's tuition would be enormous. Likewise, the federal government tells existing medical schools that if they increase their class size beyond their allocated number, they will lose their funding. Medical school class size stayed at around 16,000 for many years. It was recently increased to 18,000 because the Obama administration knows that many practicing physicians will quit due to ObamaCare hassles.

Mark V Anderson writes:

Mingov --

I admit that I don't have great knowledge of medical politics, so maybe I was wrong about it being the AMA that limits the number of medical schools. However, your discussion of why the number of spots are limited actually leads me to believe it is either the AMA or some other doctor group.

Who do you think runs the bureaucracy that decides the number of schools to get funding? MDs of course. This is how it works in every profession. To the extent any profession is regulated by the government (and funding all the schools is regulation), the profession itself always runs that regulation. Who else is qualified? So it is a group of physicians that decide how many student spots there are. Maybe it's not the AMA, but it comes to the same thing.

Shayne Cook writes:

@ Silas Barta (and Garett Jones):

First to Garett ...
Please accept my sincerest apology for misspelling your name in my first comment here. It was an inadvertent error on my part, but extremely rude on my part as well.

And to Silas ...
I don't (can't) dispute most of what you indicated in your comment. There are "fees" associated with financial services (some of which are exorbitant).

I would quickly add, though, that there are "fees" associated with any service or goods transactions that I voluntarily engage in. My grocery store charges hidden "fees" for making it easy for me to purchase goods at their store. My barber even charges me "fees" for the service he provides.

My point here is that, yes, the financial services industry charges for the services and products it supplies - just like everyone else. And if I think those charges, or "fees", or "huge hidden taxes" are exorbitant (out of line with benefit), I can voluntarily elect NOT to pay them by not purchasing those services/products. Even my participation (or not) in the types of tax-deferred/tax-preferential constructs such as IRA's, 401K, Roth IRA you noted is entirely voluntary on my part, even though highly recommended due to the tax-deferred/tax-preferred nature.

As a further point, irrespective of whether I'm dealing with my grocery store, my barber, or my stock broker/financial adviser, I know in advance what their "fees" will be, and then whether I am willing to pay them voluntarily.

Try something. Call your local hospital and ask them their full, fixed price for a knee replacement, or appendectomy, colonoscopy or any other treatment - in advance of your purchase of that treatment. Ask them also if you would still be required to pay for that treatment, if indeed it harms you instead of making your life better. You won't get a price or an answer.

To Garett's point here, the problem with the salaries of specialists in the U.S. health care industry, or any other aspect of the costs of the U.S. health care industry, are exclusively attributable to the way the industry is financed in the U.S. - the system of guaranteed payments for "treatment", not results.

Mm writes:

Shayne- while a common argument- it is a crock. Try asking your defense attorney how much you have to pay if you go to jail? If stocks go down does your broker rebate his commission? I guess if I save your life thru a medical intervention I should demand 1/3 of your subsequent earnings( ala ambulance chaser). The problem isn't guaranteed payment, but that, first, Medicare & Medicaid is a monopsony and further each insurer negotiates a separate price. Providers don't quote you a price b/c you are not the payer- and each payer has already negotiated its own price structure.

h.e. writes:

You are missing the big picture.
doctor's salaries are about 10 percent of total healthcare costs. So, even if you cut doctor's salaries by 50 percent , you save 5 percent for 1 year. Your insurance costs are going up at least 5 percent a year. I can assure you doctor's salaries are not going up 5 percent a year.

If you save that 50 percent of doctors' salaries by hiring nurse practioners, you may not save any money at all. The nurse practioners I have worked with tend to order more tests, and spend more healthcare dollars.
There will always be people willing to become doctors even if the salary is cut. But that is not going to fix the problem of spiraling healthcare costs.

aldo fantin writes:

The analysis in incomplete. Europe has socialized medicine. The main employer of physicians in Europe is the state. People do not pay for health care directly they pay taxes. Few patients have the means to choose a private doctor. You see the Doctor to whom you are assigned, similar to the choice of public school that we have in the US. By the way teachers are not paid well in Europe or the US.
Training is not comparable, Europe is in most cases pyramidal in nature, people at the top have no incentive to share all the techniques they know with future competitors.
Primary care in the US is comprised of a large number of international medical graduates. Few US medical school graduates want to train in primary care.
A larger number of MDs is not equal to better care. In surgical specialties it is advisable to have surgery by someone who performs enough a week to retain her skills.

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