Question: Are doctors in the United States overpaid?

Answer: If we judge by how well compensated doctors in foreign countries are paid, the answer is an affirmative. There are a couple of caveats to this, however. For one thing, being a doctor in the United States is often a more expensive proposition than abroad. In many countries, doctors do not have to spend a full eight years in school (and incur the costs thereof) and higher education has greater subsidization by the state. By the time a doctor finished a three-year residency at 29 years of age or older (excluding prodigies), they have made maybe $150k in salary as a resident and may be in debt anywhere from $150k-500k. Had the same student chosen a business, engineering, or technical field, they could easily have earned in excess of $300k and will owe only what they paid for their undergraduate education.

All of that being said, even if you factor these things in, our physicians are still very well paid and from a financial standpoint will be better off for having chosen to be a doctor. I mention the caveats because they will come up later.

Q: Is this because of an artificial shortage of physicians created by the medical establishment?

A: The evidence for this is pretty weak. Back in the early 1980’s and 90’s there were fears within the medical community of an excess of doctors. They severely reined in the number of slots at medical schools and the creation of more medical schools. Thus, the physician shortage was either born or at least exacerbated. The result? Physician compensation since the early 90’s has been stagnant. Between 1995 and 2003, it actually fell 7%. A good portion of that fall can be ascribed to the average number of weekly hours a doctor works falling from the mid 50’s to the low 50’s, though even if you factor that in you still have stagnation.

Further, if shortages drew up compensation, you would see differences in how much specialties have changed over time. Primary care physicians are in particularly short supply, but it has not resulted in an increase in compensation. If anything, their wages have been the most constant and consistently below specialties where the shortages are not occurring or at least not occurring as loudly.

Q: What about supply and demand?

A: They don’t seem to apply as much to physicians as you might think. There are a lot of reasons for this, which will be explored below. The long and short of it is that physicians don’t work in a traditional market economy. Their ability to fully take advantage of their scarcity is limited by the fact that they have to negotiate with insurance companies and the government who contain a large amount of bargaining power. Rural hospitals, for example, have a really difficult time recruiting. Doctors often don’t want to live in the sticks and the ability of a hospital to bribe them to do so is limited by a relatively inflexible payment structure.

That’s not to say that the industry is immune from market forces. If we’d been adding thousands upon thousands of doctors since the 90’s, it’s possible that pay would have gone down more than it did because it would have given insurance companies and the government additional negotiating leverage. However, as I will explain below, that would not necessarily lower the collective costs of health care. Even if they didn’t, more doctors would increase access to care, though, and that is a worthwhile goal in its own right. Nothing I write here should be construed as a desire for the perpetuation of the physician shortage.

Q: So are physician salaries responsible for the skyrocketing costs of health care in this country?

A: Not in the direct way that a lot of people imagine. As explained above, the increased money flowing into the system has not been making its way into the hands of physicians. As I will explain below, without other changes you’re not going to see significant savings when the bill comes due.

Q: Still, though, we could reduce costs if we paid physicians less. Right?

A: Right, though not as much as you might think. According to health care economist Uwe Reinhardt, Physician take-home pay is about 10% of total health care expenditures. If you cut that in half, you have saved 5% of health care expenditures. That’s an aggressive estimate. Some people cite a the McKinsey Global Institute figure of $64 billion that we spend on higher earnings for physicians. Two noteworthy things about the MGI numbers. First, they cite “physician compensation” as being rougly 8.7% of health care expenditures instead of 10%. Second, while $64b is a large number, eliminating it would only represent a savings of 3% of total health care spending.

However, in order to make those cuts we would probably need to do one of three things: We would either need to reduce the costs of becoming a doctor, we would need to resign ourselves importing our doctors, or we would have to accept medicine as a less desirable profession that the best and brightest are not going to be interested in..

In the case of reducing the costs to become a doctor, there are ways we could do that which wouldn’t be expensive. For instance, we could scratch the requirement that doctors get an undergraduate degree. That way they could go straight into medical school and get out in fewer than 8 or 9 years. Other solutions, though, would involve subsidizing their education and that would cost money. Right now it’s not unfair to expect doctors to incur all manner of debt to become doctors because after they do they will be compensated enough to pay them back. Take away the compensation and you take away the willingness of the best and brightest top become doctors. If you’re thinking that we can count on them doing it for the job satisfaction, think again.

We could still import foreign doctors. Keep in mind, though, that the foreign doctors we would be importing would not be be coming from Europe and England. Since we wouldn’t be pay much more over here than they do over there, they would have no reason to come here. Instead, we would be getting doctors from India, Latin America, underdeveloped East Asia, and Africa. To be fair, I can’t remember the last time I saw an eye doctor without a thick accent and I have been very satisfied with the service that I have gotten from them, so it’s not something I am personally deeply afraid of. But it’s just something to keep in mind. A lot of people feel differently.

Q: Still, though, we could reduce costs if we paid physicians less. Right?

A: Yes, if we are willing to cut physician wages, if we still let them fend for themselves when it comes to getting their medical education, if accept that an undetermined number of those among the best and the brightest that become doctors now would instead do something else, if we are willing to see an increasing number of doctors from the third world, and if we are willing to risk losing American-educated doctors to Canada, we could save 3-6% of our health care costs.

Oh, and if we’re able to figure out a way to reduce physician pay. Reducing reimbursements and fees alone is not only unlikely to accomplish this, but could backfire and cost us more money. A lot of it. I mention above that health care costs are skyrocketing while physician pay has been stagnant. Arguably, these two are related. As costs have gone up and reimbursements have not, many doctors have chosen to get… creative. Entrepreneurial, even.

Let’s consider a fictitious doctor named Dr. Arthur Pineur. Dr. Pineur gets $70 every time he runs Test X, which costs him $50 to run and he does twice a week costing insurers and the government $140 and netting him $40. If you cut his reimbursement to $60, he can either accept the slashed pay or he can make up for it somehow. If Pineur is not a particularly ethical man, he can just target random patients and run the test twice as much. He used to run it twice a week, now he runs it four. He is making the same $40 he was making before, however the system is now paying $240.

A year or so passes and expenses have gone up but reimbursements have not. How can he avoid taking an income hit? Well, he can order Machine Y so that he can run Test Y. That way, he can profit every time Test Y is run. So he puts down $10,000 and buys Machine Y. Okay, well now he has to justify that investment and pay back the loan he took out to buy it. So now he’s running Test X and Test Y as often as he can. The more he is squeezed, the more ways he finds to supplement his income.

Now, Dr. Pineur has an ethical shortcoming. But there are a lot of gray areas that he is exploiting, so he’s not committing out-and-out fraud. In fact, maybe he can even convince himself that he is doing the right thing because he’s just giving his patients the most care that he can. The more docs do this, the more he can justify it to himself. Before long, you have a medical culture built around it. You have McAllen, Texas.

Now, McAllen is an extreme example, but at the end of the day at present it is not the job of doctors to control costs. Throw in litigation concerns, doctors earnestly wanting to try to treat and screen for everything just in case, and incentives to inflate costs and they can (sometimes intentionally, sometimes unintentionally) generate a whole lot of costs even while ultimately taking home comparatively little of it. Racking up a quarter’s worth of cost for a nickel’s profit.

If you’re looking at doctor pay and the high cost of health care in this country, you’d do a lot better looking at the “how” rather than the “how much” doctors are paid. Of course, that’s easier said that done. Most available options involve some list of things undesirable to many or most Americans. The potential savings from that, however, are much more significant.

-{Disclaimer: Do I really need to even say so? Well, I will for new readers. My wife is a doctor. She is a doctor in one of the least profitable sectors of medicine (because she chose to be, not because she didn’t have options). She is a salaried employee, so my Dr. Pineur example should not be considered commentary on how she practices medicine. She did not contribute to the writing of this post.}-


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About the Author

Will Truman (trumwill) is a southern transplant in the mountain east with an IT background who bides his time taking care of their daughter while his wife brings home the bacon. You will probably be relieved to know that he does not generally refer to himself in the third-person except when he's writing short bios on his web page.

18 Responses to Physician Compensation Q&A

  1. Sheila Tone says:

    You don’t have to convince me. And I think ob-gyns ought to have status and compensation on the rate of emergency room physicians. They deal with a lot of emergency situations during childbirth, and plus they have to deal with *conscious* patients in great pain whose cooperation they have to engage.

    I want the doctor whose job it is to cut my junk, yank a person through it, then stitch it up to drive a Ferrari, not an Acura. And I want him being absolutely focused on his job. I want him motivated to spend his evenings and weekends contemplating better ways to get people out of women.

    Many people probably don’t appreciate doctors until they need one for something extreme. They think it’s like being an auto mechanic. Especially with childbirth, there seems to be this crazy idea out there that it’s supposed to be an easy, natural process. Not for most humans, it isn’t. We have evolved otherwise. I heard the human maternal death rate during birth in the wild is one in eight. Not to mention all the bad not-immediately-fatal injuries one can get. There’s good reason the Caesarean rate is one in three.

    Now I have to go take another sitz bath. As lame as that is, it greatly beats dying in the wild, which is probably what would have happened to me.

  2. Sheila Tone says:

    Uh-oh, did I scare people off this post? I promise not to talk any more about my vagina on this thread.

  3. trumwill says:

    I prefer to think that I was so right that everybody is just reading and nodding their heads in complete agreement.

    It’s funny you should mention Acuras (or maybe you’re thinking back to having read the exact same article that I did). There was an article in the NYT wherein doctors were complaining about how difficult it is to make the kind of money they were promised when they signed on to be doctors. One of them was complaining about having to buy an Acura.

    When I read it I was unfamiliar with the Acura brand (I never shopped for a car before) and thought it was some cheap-o brand. Since I am interested in cheap-o brands, I looked it up and was deflated to realize that he was complaining about a plain luxury car.

  4. trumwill says:

    Obstetricians seem to get pay comparable to that of emergency room docs, both of whom get paid less than surgeons and more than general practitioners. It seems that ER docs, I guess by virtue of the fact that they’re most likely to be employees and among the least likely to be entrepreneurs, seem to have comparatively little variation in pay. They average almost exactly the same as OB, but their lows are higher than OB lows and their highs are lower than OB highs.

    Pay aside, though, emergency docs are more likely to have a set schedule that they can live around. Obstetrics means having to be ready to deliver a lot of the time. So it requires a lifestyle sacrifice.

    Clancy performed her first c-section since leaving Cascadia the other day. The last time she worked in the private sector, at the reservation in Sierra, she had a big giant cloud over her head that prevented anybody from giving birth while she was around.

  5. DaveinHackensack says:

    Tone’s vag talk reminded me of something (I didn’t read Trumwill’s whole post, so I won’t comment on that at this point): a legal pundit (I forget who) once wrote that there would have been a lot less controversy over abortion if the Supreme Court used an equal protection argument based on the risks of giving birth (that Sheila mentions in her comment) instead of making up a bogus right to privacy (which, if one exists, apparently doesn’t apply to laws against illicit drug use, suicide, etc.).

  6. David Alexander says:

    I looked it up and was deflated to realize that he was complaining about a plain luxury car.

    Hehe, mere mortal doesn’t realize the differences. 🙂

    While Acura is a luxury brand, I’d argue that it’s prole luxury. In other words, it’s the car for guys who work a lot of OT, have great seniority, or magically lucked out with some great financing. For years, it was tainted as the drug dealer’s car of choice. It certainly doesn’t compare to the refined quality of a Lexus or Mercedes, nor the sportiness of a car from BMW, Audi, or Infiniti. It’s effectively a luxury Honda Accord variant…

  7. David Alexander says:

    Now I have to go take another sitz bath.

    Congrats on the new addition?

  8. trumwill says:

    Once I read what it was and started seeing them on the road, my mind more-or-less equated them with Lexus and Infiniti, which I was vaguely familiar with and mentally put below the other brands you mention.

    I find the auto industry’s badging to be kind of annoying. Particularly when the cars have siblings so the difference between a Ford Escape and a Mercury Mariner is the logo and a few features.

  9. DaveinHackensack says:

    Mercury never made any sense. A Sable was never appreciably different from a Taurus, in my estimation. Speaking of which — an old family friend, a WWII vet & successful real estate investor — invites C. and me out to dinner at the University Club in NYC a couple of times per year (worth visiting, if you get an invite, to see the spectacular ceiling in the library. The dinner isn’t anything to write home about though. My father used to call it “an Ivy League Sizzler”). Anyhow, this fellow lives on 5th Avenue, an especially nice part of it called “The Museum Mile”. And he drives down to the University Club in the same ’92 or ’95 Mercury Sable he’s owned for as long as I can remember.

  10. trumwill says:

    Yeah, Ford is one of the worst. There is practically a 1:1 between Ford and Mercury. GM is another one with a vehicle in the SUV class (Chevy Traverse) that had four different names. Dodge/Chrysler at least changes the stylings somewhat.

    I like what Hyundai is doing, releasing a high-end car and calling it a Hyundai (which of course they are criticized for). They have some duplication between Hyundai and Kia, though I give them a pass since they’re two different companies with common ownership (like Ford and Mazda until recently) so it’s not quite the same thing as Hyundai creating a new line (or keeping the name of a company they bought) just because.

    On the other end of the spectrum, you have Subaru and Mitsubishi that release suffix-named cars that could probably stand a better degree of brand differentiation. The Subaru Impreza and the Subaru Impreza WRX (and the Mitso Lancer and Lancer Evolution) sell to completely different audiences.

  11. Maria says:

    Sheila had her baby? If so congratulations Sheila!

  12. rob says:

    I wondered in stone was going to be 12+ pregnant. Congratulations.

  13. Sheila Tone says:

    Thanks, everyone. He’s adorable, but not much fun to talk to.

    Yes, Will, I think I was remembering a doctor quoted to to the effect of, “The public decided it wanted us driving Acuras.” Maybe it was that story.

    Seriously, it seems childbirth is a lot to ask of most human females. There are those lucky few that can just easily pop them out at home, but most of us need skilled professionals there to do gory stuff. No other animals need that. And no other animals need six weeks to recover.

    Forget about sexbots. There should be birthbots. Wouldn’t it be great, to leave the whole job to a high-tech fetal incubator with a buzzer that goes off when it’s done.

  14. trumwill says:

    I wonder what the pregnancy-mortality rates are for animals and people not under medical supervision. I think that to some degree you accept mortality and complications in animals in a way that would be unacceptable in humans. Clancy is somewhat supportive of midwifery and laments the animosity between midwives and OBs. The thing about midwives and whatnot, though, is that you can pretty easily jettison those plans whenever you want to. So even if we looked at midwife mortality rates, you would have a selection problem. Those that are most inclined to go that route are the ones most likely to have a healthy pregnancy in any event.

    As for birthbots, that would be pretty popular for the men that want a child of their own but don’t have the means of delivering one. It’s funny you should mention this because I was just thinking about artificial incubation yesterday.

  15. Maria says:

    I’m so happy you had a healthy baby, Sheila! And that you’ve managed to reproduce yourself, unlike, heh, heh, a certain evolutionary dead end blogger I could name.

  16. David Alexander says:

    Thanks, everyone. He’s adorable, but not much fun to talk to.

    Hehe, two sons. Will one attempt for a daughter? 🙂

    As for birthbots, that would be pretty popular for the men that want a child of their own but don’t have the means of delivering one.

    There’s a certain part of me that wonders if a man is unable to secure a woman for a long-term relationship, would he be the best candidate for fatherhood.

  17. stone says:

    “Hehe, two sons. Will one attempt for a daughter?”

    Hell, no. 🙂

    Even if I had a birthbot, we can barely handle two, much less three.

  18. Maria says:

    I’d have had another girl, but not another boy.

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