Wednesday, July 29, 2009

Doctors, Salaries, and Productivity

My undergraduate economics textbook has some interesting things to say about the salaries of health care professionals:

Conventional wisdom has been that physicians groups, for example, the American Medical Association, have purposely kept admissions to medical schools, and therefore the supply of doctors, artificially low. But that is too simplistic. A rapidly rising cost of medical education seems to be the main cause of the relatively slow growth of doctor supply. Medical training requires 4 years of college, 4 years of medical school, an internship, and perhaps 3 or 4 years of training in a medical specialty. The opportunity cost of this education has increased, because the salaries of similarly capable people have soared in other professions. The direct expenses have also increased, largely due to increasingly sophisticated levels of medical care and therefore medical training.

High and rising education and training costs have necessitated high and rising doctors' fees to ensure an adequate return on this sort of investment in human capital. Physicians' incomes are indeed high, averaging about $220,000 in 2004, but so too are the costs of obtaining the skills necessary to become a physician. Data show that while doctors have high rates of return on their educational expenses, those returns are below the returns for lawyers and holders of masters of business administration.

Is the rise in rise in doctors' salaries is due to rent-seeking behavior, as some suggest, or are there other economic factors at play?

There is also the issue of slow productivity growth in the health care industry:
Productivity growth in an industry tends to reduce costs and increase supply. In the health care industry, such productivity growth has been modest. One reason is that health care is a service, and it is generally more difficult to increase productivity for services than for goods. It is relatively easy to increase productivity in manufacturing by mechanizing the production process. With more and better machinery, the same number of workers can produce greater output. But services often are a different matter. It is not easy, for example, to mechanize haircuts, child care, and pizza delivery. How do you significantly increase the productivity of physicians, nurses, and home care providers?

Also, competition for patients among providers of health care has not been sufficiently brisk to force them to look for ways to reduce cost by increasing productivity. When buying most goods, customers typically shop around for the lowest price. This shopping requires that sellers keep their prices low and look to productivity increases to maintain or expand their profits. But patients rarely shop for the lowest prices when seeking medical care. In fact, a patient may feel uncomfortable about being operated on by a physician who charges the lowest price. Moreover, if insurance pays for surgery, there is no reason to consider price at all. The point is that unusual features of the market for health care limit competitive pricing and thus reduce incentives to achieve cost saving via advances in productivity.

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