What Will We Tell the Doctors?
“The practice of medicine was accepted to be a chancy way to make a living, and nobody expected a doctor to get rich, least of all the doctors themselves.” – Lewis Thomas, The Youngest Science, p. 4 (Penguin, 1995 edition, quote via Google Books)
Lost in the discussion of Paul Ryan’s “plan” is the group of entrepreneurs that will be most harmed economically by enacting it: doctors—most especially general practitioners.
I was speaking with David Warsh last week at Kauffman, and pointed out what “everyone knows” but no one will say: U.S. doctors net about twice as much money as doctors in the rest of the civilized world. (As a ballpark, $200K in the U.S. and $100K elsewhere.) And until you can solve some of that, you won’t really make much of a dent in the High Cost of Medicine. David noted that solving that “isn’t going to happen.”
Paul Ryan’s plan is a large step toward making it happen—just not in the way David (or I) would have expected it to happen.
Let’s sidebar the usually Capitation v. Fee-for-Service discussion, which will only have an effect at the margin. Assume that doctors net, say, $25 per patient (net of paying for office staff, supplies, waste disposal, etc.).[1] If they schedule four patients per hour ($100)[2] for eight hours a day ($800) five days a week ($4,000) for a fifty-week year ($200,000), they make their salary.
Note the assumptions I made: the per-patient return is certainly variable (standard MC/MR curve), so the real return is based on volume and where that volume falls on the MC curve. So long as a doctor can schedule to see 160 people a week—8,000 visits a year—they are continually busy and receive optimal returns.
But the market is not perfect. I am of an age where a few visits a year is strongly suggested. Tom or Rebecca, by contrast, go in once (if at all) and otherwise when they are unhealthy.[3] It seems intuitive that, given search costs (think labor markets), a doctor’s practice is marginally more profitable with more repeat patients. Customer retention is therefore of enhanced value in the current equilibrium.[4]
But shifting the burden of payment while not capping insurance margins is also an easy first-order solution: fewer insured people, certainly; higher margins, probably (positive, maybe not significant), shifting of funds toward the sector that reduce overall consumption, and—inevitably—fewer doctor visits for the older and most likely to need care.
Note [4] above becomes relevant on the supply side; the relationship is weaker if still positive. But the discretionary spending is reduced; Fee-for-Service fades except in the “concierge” segment of the market. Capitation becomes the rule, and the model that has become prevalent—insurance companies guaranteeing doctors a salary—become the rule.
But visits to the doctor have declined, due to those most in need having the least ability to pay and therefore dropping off the insurance rolls.
So the insurance company doesn’t expect the doctor to make 8,000 separate treatments a year. Or they do, but find at the end of the year that they were mistaken. The next year they offer to pay based not on 32 patients a day, but rather 30. And, given the frictions in the market, the majority of doctors agree, preferring the certainty of $187,500 a year to the risk of treating the uninsured, who are now a much riskier group.
And then the multiplier effect comes in. Recall that there are fixed costs as well; doctors’s returns mirror the standard MC/MR curve. So the actual loss begins gradually, but becomes steeper as the years go by—convexity effects appear.
Eventually, doctors have to right-size their practice. The current trend toward Vertical Integration may mitigate effects in the short term. But eventually—probably within 15 years, though it may take 20—doctors will find that their salaries (“net capitation fees”) are significantly closer to those of their European and Canadian peers.
Coincident to its effect on the poor and the elderly, Paul Ryan’s plan will speed the convergence of doctors’s salaries in the world. The aspiring doctor in the Harvard Class of 2037 may well look at Lewis Thomas’s thoughts of one hundred years previous and say, “Nothing ever changes.”
The question that remains today is “What will we tell the doctors?”
[1]When I looked a few years ago, my doctor was paid $41 for my $125 office visit from insurance, and I had a $15 copay. If you can’t figure out how $56 gross can become $25 net, go into a heavy-service industry, such as restaurants or doctoring, and look at their cash flows.
[2]Note that there is no inherent need to conform to the schedule, assuming the patients are not time-constrained. That is, one can spend longer with patients—more than eight hours in a day—and maintain quality of care at the expense of leisure time. This is a fairly simple equation and is left for when this isn’t a blog post.
[3]Again, the equation to show when the marginally-unhealthy choose to visit the doctor is left as an exercise. All we need for blog post purposes is to know that the choice is dependent on several factors, including disposable income and out-of-pocket cost.
[4]This is in no small part, at the margin, due to the support of the current Medicare/Medicaid system.
[5]Contracts still require both parties to consent, and the 6.6% decline is the net result—one might assume that some insurance companies will reduce their margins to pay doctors more. One might also assume a pony with a pointy thing sticking out of its forehead with equal likelihood. There may well be a chimera of hope—though the scenario only extends the timeframe instead of ending the process—but it will not be sustainable, though it may be iterative (which would further attenuate the process).
Yeah, this isn’t the biggest issue with physician pay. In fact, Ryan’s plan will likely worsen the biggest problem.
That is, the income disparity gap. Recent surveys have found that only 2% of medical students plan on entering primary care. My current research is examining the reasons behind PA specialty selection, as PA’s are following the same specialty demographics. Part of this has to be due to money.
The average FP (2008 dollars) makes about 148,000, while the average neurosurgeon makes 476,000 (2008 dollars)…
I’ll put more into a post for the site and for Dan. But, it’s the income disparity gap that is in part fueling healthcare costs.
In 30+ plus years I have never seen a physician with 8000 enounters per year, I suppose somewhere there are some somewhere.
The physician office tends to have a very low variable cost per encounter but a relatively high fixed cost for opening the door. Many physicians are now looking to shift the fixed cost to a hospital or integrated delivery system, but the fixed cost is still there and somehow it has to get paid for.
Tom,
The average patient panel for a family physician is 2468.
Encounters per year will vary, but I’d say 3000-5000 is probably about right for a primary care physician. (5000 is kind of high, but there are a few reports of that).
Not enough doctors, especially GP’s.
Why are health care costs are so high? They are high because the US has an inadequate supply of health care services. A shortage of anything drives the price up, and a chronic shortage of health care leads to continuous increases in price. And the US will continue to have a chronic shortage of health care services until the the poweer of the Medical Industrial Cartel is broken. There is a shortage of doctors, for instance, because for 50 years the AMA has restricted the growth of medical schools. There is a shortage of other services because the MIC directs much of its resources to high priced and hugely profitable, technologically complex and uncertain cures, while neglecting things like preventative medicine, thus creating shortages at both ends of the medical service spectrum. If you look around, there is a shortage of everything medical, except maybe high priced drugs and treatments of dubious efficacy. And this is by design. The money to buy medical services doesn’t just go poof, into the air, it goes into people’s pockets, and these people profit hugely from the system AS IT IS.
Ryan wants to cut prices by reducing demand, that is leave increasing segments of the US population in the cold. The proper, humane way, is by increasing supply.
(But treatments must also be evaluated and perscribed based on efficacy, not just fashion.)
More MED schools, with subsidized tuition, is just one thing.
Increasing supply will also drive down prices. Indeed, if supply is increased large enough, as it is in the European democracies, governmemt intervention will be required to keep prices up.
At an average salary of about $200,000 a doctor makes about the same as the manager of your local Wal Mart or other big box retailer.
Doctors fees accout for slightly over 20% of total medical cost. But that is a gross figure and out of that they have to pay overhead– staff, lease, equipment, insurance, etc. — and that takes roughly 50% to 66% of their fees. So that leaves doctors income at about 10% of medical cost. So if we cut doctors salaries in half it would cut medical cost about 5%. This would offset about one year of increased medical cost and than we would be right back where we started.
Ya’ll– This sounds like the WI governer’s complaint about public employees. They cost too much, earn too much, have better benefits their employers, damn ’em. Now, it seems doctors earn too much compared to their peers in other industrialized countries. Doctors who work in socialized or highly regulated health care systems have subsidies from their governments which, in effect, pump up their incomes. For example, their governments pay for their medical educations and they are not required to go into massive debt to get a license to practice.
They don’t pay large malpractice insurance premiums and ALL their patients can pay for their services. Add to that and the cost of running a practice with little insurance paperwork or as an employee for a hospital or the natl. health service, and you have a completely different economic work environment. If they earn a less, it’s really kinda ok. All of the costs of the American system add up and one way you see that is in doctors’ earnings. It’s a for-profit system and is thoroughly capitalistic in every way. Why shouldn’t doctors benefit from it?
According to bankers, their compensation (taxed, untaxed, and barely taxed) is fully justified, no questions asked, and I don’t see them doing a lick of good for society as a whole. Getting rich–oh yeah, they do that all right. But, helping other people? Not so much. Here we have doctors who are, by and large, pretty decent people doing life-saving work and earning a pittance compared to others in the marketplace.
Blaming doctors because they work like dogs (and they do) and earn good incomes doing it isn’t going to get us anywhere. Look, the words “for profit” say it all. The other players in the system aren’t doing so badly themselves. We are apparently not going to deal with that aspect of health care and since we insist on cutting insurance companies in on the action to the tune of billions a year, I don’t know what we should do. But, this time around we blew it. NancyO
Spencer,
Not necessarily, many, many physicians are employees, and this salary represents gross income. Even in private practices, that other stuff is accounted for BEFORE salary.
The real issue, as I mentioned above is the disparity gap. No one in medicine will argue that a spine surgeon should make more than an FP….longer residency, longer training, higher rates of mortality/morbidity, etc.
However, the question remains…..how much more? There are spine surgeons making 7 figures…there are interventional cardiologists and interventional radiologists making 700-800 thousand per year.
THIS is what needs to change. Perhaps the average FP salary could be raised to 225,000, and the Spine Surgeon could make 275,000 on average?
This would increase FP/Primary care salaries, possibly driving people into primary care (I say possibly cause we don’t know, and some of the research is saying that money may not be the main motivator)
It would also save money overall…..But, the specialty lobbies are very, very powerful….
Brave NancyO!
I agree totally. Until the economics of being a doctor change the idea of just slashing their incomes is a non-starter.
I will now add an anedote, but it shows what the future Dr.s think. My son is graduating HS and wants to become a doctor. So do 5 of his friends and all are selecting schools based on the schools pre-med courses and offerings. None want to be a GP. Its basically just not ‘cool’ and not interesting (I agree, seeing 3-5K worth of patients a year that mostly just need asprin, chicken soup, and a few days in bed would drive anyone batty – and anything interesting goes away to a specialist!). On top of that GPs make the least amount of money – and Medicare/Medicaid isn’t going to change that. All 5 want to go into some kind of specialty (though all reacted in horror about being a gynocologist – they don’t want to deliver babies since, even at age 18, they have learned that was a great way to get sued all the time).
All 5 understand they will go at least $150,000 into debt to become a doctor, but they beleive that’s OK since the payout at the end is there. Thus the debt is a good investment. If you cut doctor pay without lowering the cost the ROI isn’t there and no one wants to spend a decade learning to be a surgeon only to live as a pauper since you can’t pay off your debts. Why go through that level of effort to get payed the same (net) as their High School friend the truck driver?
Anyway that’s what I get from the High School kids front.
And if we want to crack down on pay scales I suggest nationalizing the legal industry. Far more waste there than in the doctors offices…
Islam will change
Note — I did not say salary was some 20% of medical costs, I said doctors fees.
Ahhh. my apologies…
That’ll teach me to read and reply when on a conference call…..
There IS a (much) easier way.
Remove the AMA’s stranglehold on the supply of doctors. Then we get more doctors at lower average cost, without the distortion of government controls.
Sammy, it’s far more complicated than that…
The AAMC is already pushing forward with a 30% increase in medical student enrollment by 2018.
Problem is, there is no increase in residencies…..I think I need to write a post about all of this.
Bottom line is….output will remain the same.
Michael,
Problem is, there is no increase in residencies
This sounds more like an excuse than a reason. Interns quickly become highly productive, low cost employees. Such people always find a postition.
When you have to wait weeks for an appointment, when significant segments of the population are under served (rural), when “highly compensated” is an unnecessery adjective for “doctor,” these are all indicative of a supply problem. Free markets respond by directing more resources to increase the supply, which results in the price coming down. In the case of health care, the AMA restricts the new supply. Good for doctors, not so good for consumers.
And remember, my solution is in response to the main post, which proposes to limit doctor compensation through monopsony power.
This comment is based on my understanding of economics, not medicine, so I look forward to your post.
Sammy,
all GME residency positions are funded through CMS. As you can imagine, CMS funding is quite tight, and residency expansions are not being approved now.
As accreditation is tied to CMS funding, residency spots have remained stagnant. Especially in primary care.
I will post up here soon. I’m also writing one on free market mechanics and healthcare, which, as a lay economist, I will be very happy to get your input on.
That is the range all of my primary care budgets fit.
When physicians make the same salary as economics professors, and much less than some stock brokers or traders, there will not be much incentive to be a physician.
We can hopefully fix the system without breaking it.
The right wing is making hay out of the claim that teachers are paid too much.
Does the left wing have to play the same game with doctors?
all GME residency positions are funded through CMS.
So now we have another barrier-to-entry, this time the government. Cut the funding per position in half and double the number of postions. Some combination of student/school/hospital/patient will pick up the slack. Or eliminate the subsidy altogether.
I think it’s important to note that most “left-wing” systems of health care subsidize doctor’s educations, pay for a lot more of their personal needs (ie socialism), leave them more leisure time, and it’s also worthwhile to note that doctors in those systems tend to derive more personal satisfaction from their work and are less stressed-out than American doctors.
This post is discussing the effects Ryan’s plan would have on doctors–a pay cut to match European levels but without any of those benefits.
Plus I think it’s important to note that Ken does want to see general practitioners make more money. Some very highly paid doctors are not good doctors, for instance those that perform spinal fusions on every back-pain patient that walks through the door. Cutting out the insurance reimbursements for stuff like that would be a good thing, but private insurance companies aren’t going to do it.