Health Care Costs in the US: Are Physician Salaries Really the Problem?

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Medicine in the United States functions like a business and requires a large revenue stream to function.
Medicine in the United States functions like a business and requires a large revenue stream to function.

As we try to tackle the growing cost of health care some economists have taken aim at physician salaries as the culprit. Dean Baker is one of those economists. He is the co-director of the Center for Economic Policy and Research who recently published an article last month arguing that physician salaries were partly to blame for the higher cost of health care.1 The article appears to imply that the high cost of pharmaceuticals and medical equipment pale in comparison with physician salaries. Further, he points out that physicians in the United States earn more than physicians in other countries and that this discrepancy in incomes is not consistent in other industries such as “autoworkers” and “letter carriers.”1  He describes these pay inequalities as looking an “awful lot like a Cartel”1 — as if physicians directly control “supply” by regulating the number of medical school spots and residencies available in the United States. Moreover, he points out that hospitals control the fields of specialization, which encourages specialty training that increases revenue.

While he uses real-world data, the conclusions he draws from that data are, in my opinion, inaccurate. Much like retrospective studies in which we might find a correlation between 2 findings, the conclusion can often be erroneous due to our inability to see or control for confounding factors. Being a physician and not an economist places me in a unique position to see those confounding factors that Baker has grossly underestimated in his analysis of physician pay. His conclusions, from a physician's point of view, are drawn in a vacuum of economic theory while missing the real-world facts that explain the seemingly higher salaries.

For example, if he is going to target physician salaries as an “unavoidable part of the high cost of US health care”1 he should explain exactly how much physician salaries contribute to that total cost. Unfortunately, that's not easy to do. Roughly 20% of healthcare expenditures go towards “physician services.”2 How much of that actually goes towards individual physician salaries is unclear.

Baker fails to point out that approximately 50% of physicians receive their salary from the larger entity that employs them. While the Centers for Disease Control and Prevention (CDC) may consider payments to those entities as “physician services,” those revenues do not directly go towards physician salaries and may in fact contribute to administrative salaries collected by the growing number of administrative positions in the healthcare industry.

Likewise, the other 50% of physicians are probably in private practice. They may collect X dollars from the Centers for Medicare and Medicaid Services for “physician services,” but their salaries are not X. They are X minus expenses that may include salaries of nurses and technicians, leases, equipment rental, licensure, malpractice insurance, and all the other costs involved in a functioning practice. Included in that number are payments to cover the salaries of physician assistants, nurse practitioners, and other allied health providers (which Baker argues may help drive the cost of care down).

From my limited experiences in private practice, approximately 50% of that revenue goes towards paying overhead expenses. Medicine in the United States functions as a business and like any business it requires a large stream of revenue to function. We might argue for or against this healthcare model, but it is our current model and it is subject to the pressures of capitalism. Therefore, making a comparison with other countries in which physicians may be part of a universal health system, and in which free market economics do not apply, is unfair. Simply cutting physician pay is not going to put a dent into our healthcare costs. It may, however, discourage individuals from becoming physicians in the first place.

Baker does not describe in any detail how the cost of becoming a physician in the United States compares with other countries. Physicians in the United States often carry large amounts of educational debt, at ridiculously high interest rates, and get paid relatively little during their training years. In fact, many of my foreign medical colleagues graduate from their training programs with far less debt than US medical graduates.

For example, during my first year of residency the interest on my student loan debt alone exceeded 35% of my total residency income. Needless to say, I could not make meaningful payments towards bringing down my student loan debt. Over the course of 6 years of post-graduate training to become a cardiologist, I accumulated an additional nearly $60,000 in compounded interest on top of my already atrocious loan debt despite my monthly payments.

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