Doctors’ pay Notes for October 26

Main points

The question is why spending on health care in the US is out of line with the relationship between health care and GDP in other countries. The answer, according to our authors, is that Americans pay more for the services they buy than people in other countries and they buy more of the priciest ones. In other words, “it’s the prices, stupid.” They clearly believe that the main explanation for this is that other countries have something closer to a monopsony than the US does.


We drafted off of Gregory Mankiw’s questions for most of our discussion. In some cases, we couldn’t tell what the answer is. Just how much does medical school cost and how long does it take to repay? Why are people motivated to go into medicine in the first place? Do we want those who would just as easily switch to finance to be our doctors?

Perhaps higher costs are needed to cover the cost of medical education. But does that explain the higher rate of inflation in health care costs? Is the cost of education increasing that much faster than the general rate of inflation? Maybe. But does it explain the variation in costs within a small area, such as the state of New Jersey?

Medicare spending per beneficiary varied by a factor of three across New Jersey, depending on the practice style preferred by the physicians caring for these patients. As the right-most column in the table suggest, there does not appear to be any systematic relationship between Medicare spending and Medicare’s hospital-specific quality index.

Hospital executives, confronted with these numbers, have explained that they have little control over the utilization of health-care resources within their hospitals, as that is the prerogative of the private, usually self-employed physicians who have privileges at these hospitals and can look upon the latter as their free workshops.** Uwe Reinhardt, ”Economix: U.S. Health Care Costs Part VI: At What Price Physician Autonomy?” New York Times Economix Blog, December 26, 2008.

Maybe some of the doctors went to more expensive schools than others.

The article answered some of Mankiw’s questions. The US has fewer doctors than the median country surveyed, despite the fact that the other countries operate more like monopsonies.

The article didn’t try to explain why this is. Reinhardt suggests one reason in his blog: medical school spaces here are limited.

For reasons that elude me, United States policy makers and the medical establishment have for decades preferred to deny thousands of eager and qualified American youngsters the opportunity to study medicine and have then met the resulting shortage of physicians by importing foreign-trained physicians from other countries.

But while there is no overall shortage of qualified young Americans eager to study medicine, there is now a nationwide lament over a shortage of American medical school graduates willing to enter the primary care specialties. For that reason Medicare may soon substantially increase the fees for primary care physicians, assuming private insurers will swiftly follow suit, as usual.

The only question then is whether such fee increases will come at the expense of taxpayers or from other parts of the health care sector, perhaps even the more highly paid medical specialties, including radiology and cardiology. That is a political call.†† Uwe Reinhardt, “‘Rationing’ Doctors’ Pay,” New York Times Economix Blog, July 10, 2009.


I was most interested in the questions about whether different policies would be “equitable.” I’m uncertain what Mankiw meant by this. But using my own rough understanding, I don’t think it’s inequitable for the government to exercise market power to squeeze doctors’ pay for these reasons.

  1. The international comparisons strongly suggest they’re making more than their reserve price. There are still doctors in Germany. If the people who are doctors now insist on making the most money possible, such that nothing less than the current pay would satisfy them, then I would rather have different people working as doctors.
  2. The quality comparisons suggest that a decent portion of the incomes in some specialties comes from procedures that have no benefit.
  3. Medicine is a credence good. (Thanks Adam!) People buy what the suppliers tell them they need. It’s hard to imagine that having a third party influence the decision wouldn’t rectify the imbalance a bit.
  4. Even the worst paid classes of doctors are at the top of the income distribution and the best paid doctors are way up there. (Here’s a more complete survey.) I don’t see why everyone else should transfer extra wealth to the people at the top if they don’t have to. And, again, the international comparisons suggest they don’t have to.
  5. Society already subsidizes doctor pay through Medicare and the tax exclusion on health benefits. We’re using the power of the government to aid this transfer. Why can’t we use it to claw some of that back down the distributive ladder?

Of course, I really should say more about what I mean by “equity”. Moral philosophy is my specialty, after all. I don’t have anything general to say about what it means that is both true and illuminating for the issue at hand. But a few points strike me as uncontroversial and relevant.

  1. There is nothing unfair with buyers trying to push sellers closer to their reserve price. There’s nothing intrinsically wrong with sellers trying to get more either. That’s bargaining. In fact, neither buyers nor sellers are entitled to any price, provided that they are free to walk away.
  2. It isn’t fair to sell people services that they don’t need. It’s especially unfair when they can’t tell that they don’t need them. Doing this in a context where consumers can’t compare prices is just the icing on the cake. I’m not saying that doctors are personally malicious. But the numbers suggest that this is what they’re doing, whether they know it or not.
  3. Generally speaking, it should not be a matter of concern for public policy just where in the top 5% of the income distribution members of particular professions fall.
  4. Generally speaking, it is legitimate for the middle class to use government to shift the balance of bargaining power over prices for health insurance more in its favor given the strong strong correlation between health insurance and a need like health.
  5. Finally, not all deadweight losses are equal. An efficient price reflects what people would pay if they were left completely free to make their choices among competing suppliers. A tax or price regulation results in fewer purchases than would otherwise happen; that’s the loss. But since what people would buy with efficient prices is only loosely connected to what is good for them, it isn’t obvious that the loss, as defined in the previous sentence, would matter. Suppliers don’t really compete anyway, so it’s probably only an academic exercise to even think about it. Why else would prices vary by a factor of three in one geographically small state?

Would monopsony be sufficient?

The article suggests that monopsony is a necessary condition of controlling costs. It doesn’t show how to construct one that actually will control them. One depressing possibility is that the government will take on additional power on the demand side and refuse to use it to lower costs. In other words, we may wind up manipulating prices in a way that transfers even more wealth to the top without getting much health in exchange.

Then again, look at what is in the bills heading to the floor! Here’s Peter Orszag, director of the Office of Management and Budget, a man obsessed with health care costs:

As I have said repeatedly — and as my colleague, Christy Romer, is discussing today at the Center for American Progress — reducing health care cost growth is the key to our fiscal future. To anyone who has studied our fiscal facts, this central conclusion seems indisputable.

And yet — perhaps because of the long-standing (and sometimes warranted) skepticism toward government, the fiscal irresponsibility of recent years, or just the generalized jaundiced view that journalists often like to project — every few days, there seems to be another commentator who fails to believe that we can pass deficit-neutral health insurance reform that also puts us on a path to reduce the deficit over the long term.

Fred Hiatt in today’s Washington Post is the latest of these naysayers, writing in his column that the two biggest steps that can be taken to reduce the rate of health care cost growth — changes in health care’s tax treatment and an independent Medicare commission — are missing.  I agree with Hiatt on the potential substantial benefits in terms of cost containment from these two changes. But a note to readers who have not read their Washington Post the past few weeks: the Senate Finance Committee bill includes both of these measures.

Indeed, that committee’s final mark creates an excise tax on insurance companies offering high-premium plans — which would create a strong incentive for more efficient plans that would help reduce the growth of premiums. And it establishes a Medicare commission — which would develop and submit proposals to Congress aimed at extending the solvency of Medicare, slowing Medicare cost growth, and improving the quality of care delivered to Medicare beneficiaries.‡‡ Peter Orszag, “Missing the Boat on Cost Containment,” October 26, 2009.


First, Remy stuck up for her claim that obesity is a significant cause of the inflation of health care costs. She passed on a policy brief from the Robert Wood Johnson Foundation that claims it adds about 12% to cost increases. Ouch!

Second, George Halvorson, the CEO of Kaiser Permanente, illustrates the claim about unit costs in the US.

The point is that CT scans in this country cost a multiple of what everyone else pays. It costs a few hundred dollars in Europe and over $1,500 here. You can't find a place in Europe that costs $1,500. You can't find a place here that costs less than $1,500. Anyone who is looking at the cost of care and is not looking at the unit cost of care is missing the point. ... To have a health care debate in this country that isn't aware of the price differential is not an informed debate.§§ George Halvorson, quoted by Ezra Klein, “It’s the prices, stupid,” Washington Post, October 27, 2009.

Of course, we knew that.

This page was written by Michael Green for PPE Senior Seminar, PPE 190, Fall 2009. It was posted October 26, 2009 and updated October 27, 2009.
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