The Myth of the Overpaid Doctor

American doctors make significantly more than their European counterparts - in 2008, an Orthopedic physician in France averaged $154,000 annually; in American, it's almost three times as much at a whopping $442,000 - and this is after adjusting for costs of living. And a common refrain from those concerned about America's health care spending is that these doctors are significantly overpaid. Matt Yglesias at Slate argues this in two posts, coming to the conclusion that Medicare's monopsonistic position should be used to "negotiate" down doctor's salaries:

But when it comes to the question of health care costs overall, Medicare is the solution. Its vast bargaining clout lets it get much better prices than any private insurer, and we should be relying on it more to pay our bills, not less.

It makes sense to start with one of Yglesias' first comparisons - the U.S. versus Canada. He notes that while American doctors get paid quite a bit more than Canadian doctors, Canada has 25% more doctors' consultations per capita than America. He also briefly mentions "overprices" for medical equipment and pharmaceuticals as other cleavages between us and Canada, but not surprisingly, leaves it at that.

If there's a bell going off in your head right about now, there's a good reason. Canada has one of the longest waiting times for elective surgery in the OECD - in 2010 25 percent of people that received elective surgery had to wait more than four months for it! In the U.S., this is a mere 7 percent. The comparison also holds when looking at waiting times to see specialists. This is an important tradeoff - if you want more government sponsored health care, or at least more intervention, you will likely see reduced access.

But this doesn't change the fact that American doctors do get paid a lot more than those in other countries - this alone, however, isn't terribly problematic. Wage variations among countries exist - American office clerks make about 20 percent more than British office clerks; meanwhile, British firefighters make about 13 percent more than French firefighters. Does this mean we should "bargain" down the salaries of British firefighters or American office clerks? There are literally hundreds of reasons that certain jobs have wage variations among similar economies - unionization, differences in work weeks, or the amount of training required - these factors can and do affect wage differences. The last point is especially salient in explaining the American variation - American doctors face the largest barriers to entry, in terms of the amount of education required (minimum of 11 years including undergrad for a general practitioner), licensing exams, and the steep cost of a medical education. Given that we are already facing a shortage of GPs, it seems unwise to focus on restricting their salaries. (Although, part of this shortage would certainly be explained by Medicare's hugely specialist-skewed reimbursement rates).

The other point that should be skewered is that Medicare is "cheaper" than private insurance. Part of this argument stems from the statistic that Medicare's administrative costs are a mere two percent. The first problem is that this only uses one measure of Medicare's administrative costs - the one published by Medicare's trustees. In reality, there are two different measures - one from the National Health Expenditure Accounts and the other from the trustees. The former shows Medicare's admin costs growing to about 6 percent in 2010; the latter shows them at less than 2 percent in 2010 - quite a large variation. But even with these two divergent measures of admin costs - one important source of costs is excluded: fraud and waste. The GAO has routinely found that Medicare and Medicaid (with Medicare making up more than half) made about $70 billion in improper payments in 2010 - close to 10 percent of the two programs. Other estimates by the RAND Corporation, however find that fraud and abuse may be as high as $98 billion in the program. The second problem with thinking that Medicare is cheaper than private insurance is simply that it isn't - the latest Health Expenditure Accounts show that benefits provided by Medicare cost more than twice the same benefits provided by private insurance. The overall point is that not counting the fraud rate or these per-enrollee costs paints an incomplete picture of Medicare - to no one's benefit.  

Yglesias comes from the perspective that Medicare's reimbursement of physicians is more in-line with their actual costs and reducing all-around reimbursement to those levels would help shave down health care spending - but this looks at Medicare in a vacuum. The literature has found that hospitals respond to lower Medicare reimbursement by shifting costs to private insurers (in a competitive market they focus on cutting costs, but other literature has indicated that hospitals often operate in more concentrated markets). Indeed, what Yglesias seems to miss is that Medicare may very well drive part of the growth in health care costs by shifting them.

To his credit, Yglesias touches on some important physician-related reforms - he acknowledges that medical school is extremely expensive and that addressing malpractice reform can encourage more people to become doctors. But he stops short of real reforms - reducing the requirements to become a GP; fixing Medicare's terrible specialist-skewed payment model; and aligning Medicare away from the ACO model which encourages consolidation (and drives up costs). These reforms would begin to address both the supply (barriers to entry and consolidation) and demand (Medicare's payment model) side of the equation in a meaningful way.


How much physicians are worth could only be determined in a medical free market. Since docs are licensed agents of states which limit medical school graduates, are increasingly employees of institutions heavily regulated by governments, and are mostly paid by government agencies and insurance companies (due to regulatory policies), there is no possible way to determine what a physician might earn in unfettered competition.

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