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One Reason Why Doctors Are Paid So Much: North American Education

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One Reason Why Doctors Are Paid So Much: North American Education

March 9, 2020

According to a 2018 study, generalist physicians earned an average of $218,713 in the United States, compared with an average of $133,723 across OECD nations. The disparity was even wider for specialists, who earned an average of $316,000 in the U.S. and an OECD average of $182,657. Can anything be done to reduce America’s relatively high physician costs?

These disparities in large part reflect differences in wage rates between countries, which are greatest for the most-educated workers. In the United States, individuals working in business, law, or education earn substantially more than those abroad, and so health care jobs must also pay more to attract educated workers. A recent study matching equivalently educated workers found that high-skilled Canadian health care workers earn 26% less than their counterparts in the United States, while Canadians working in other sectors of the economy earned 22% less than equivalent American workers. 

However, Canada’s level of physician compensation is also high in comparison with the rest of the OECD. This is in part because both countries impose similarly elevated educational constraints on entry into the medical profession.

Medical education in Canada and the United States was given a distinctive structure by the 1910 Flexner Report. Whereas Europeans may study medicine as undergraduates (usually with a 5- or 6-year course), in North America students must study for eight years before receiving a medical degree (4 years of medical school in addition to a 4-year undergraduate degree). This is then usually followed by a residency of 3 to 7 years, depending on the specialty.

The additional years of study (with associated tuition fees, living expenses, and earnings foregone) required prior to medical training increases the cost of entering the medical profession and reduces the supply of doctors without demonstrably improving the quality of care. The United States and Canada both have few physicians per capita relative to other OECD nations, and this disparity is likely to grow. The United States produced only 7.6 medical graduates per 100,000 citizens in 2017 and Canada 7.7, while France trained 9.5, Germany 12.0, and Australia 15.5. 

The insistence that medical schools be nonprofits has also inhibited their growth in response to rising demand. In 2019, only 21,869 of 53,371 applicants to medical school were able to find places. It has also prevented them from being efficiently structured to train medical students at the lowest possible cost. The median debt for medical school graduates is now over $200,000. For medical schools, teaching usually ranks below research as a priority. At Harvard Medical School, education accounts for only 6% of the budget. 

As a work-around, Americans are increasingly going overseas for medical school—most often to the Caribbean, where annual tuition averages $8,750, in contrast with $63,086 in the United States. As a result, 13% of graduates seeking U.S. medical residencies in 2019 (and 7% of those receiving them) were U.S. citizens who had earned their medical degrees abroad. 

Residencies also represent a significant bottleneck in the training of new physicians, with 20% of applicants failing to secure a placement in 2019. Residencies are supported by $16 billion per year in federal subsidies for Graduate Medical Education (GME), ostensibly to compensate hospitals for the time that experienced physicians and costly equipment are used for teaching. Yet, residents perform valuable work for hospitals for which they are underpaid, and distributing GME subsidies mostly as add-ons to Medicare fees has done little to increase the overall supply of medical graduates trained. Rather, GME subsidies (of which New York receives 50 times more per capita than Wyoming) have tended to pull residents away from low-cost community settings into big-city academic medical centers, where the costs of living and training are both higher.

Among U.S. physicians, pay levels vary greatly, with various surgical specialties earning more than twice as much as primary care physicians, and average incomes for neurologic surgeons rising above $800,000 per year. Across OECD countries, there is a pronounced negative correlation between the number of medical specialists trained per capita and the ratio of specialist remuneration to average wages. 

In the United States, the supply of residency slots for each medical specialty is under the control of residency review committees (which are controlled by members of those specialties), and regulatory barriers to entry into medical specialties have long been identified as inflating incomes of practitioners. The effect of the constraint can be gleaned from the fact that 99% of the 232 neurological surgery residencies were filled by U.S. medical school graduates, in contrast with 39% of family medicine residencies. 

One study concluded that half of the wage premium for high-cost specialties may be explained by restrictions on entry. Another has suggested that medical students might be willing to forego salaries and pay hospitals to obtain residencies in the most lucrative specialties—enticing the costliest surgeons to spend more time training new entrants into the profession. The study estimated that this might increase the quantity of residents by up to 30%, while increasing the availability and reducing the price of services delivered by those specialists.

The high cost of physician labor owes much to America’s generally high wage levels for skilled workers, but there may be some scope for cutting costs by lowering barriers to entry into the profession.

Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

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