The Bargain

When Uwe “It’s the Prices, Stupid” Reinhardt opened his New York Times op-ed with this question:

Here’s a question I like to put on the final examination in my first-year economics course:

“Are undergraduate medical education in medical schools and subsequent residency training in teaching hospitals (called graduate medical education or GME) public goods that therefore should be publicly funded or at least receive substantial government subsidies?”

I was in the position of Arnold Horshack in the old TV show, Welcome Back, Kotter: I knew the answer and had my hand up in the air. But it’s a trick question. “Public good” is a term of art in economics and public policy theory. A good that is non-rivalrous and non-excludable is a private good. “Non-rivalrous” means that my usage of the good does not preclude your usage of the same good at the same time. An example of a non-rivalrous good, for example, is national defense. We may not benefit by it equally but we both benefit by it at the same time. “Non-excludable” means there’s no way to prevent my using the good without preventing your using it, too. National defense fits that qualification, too, which means that it is, by definition, a public good.

Medical education is obviously a private good and as Dr. Reinhardt notes:

Medical education and training represents human capital that is fully owned by the trainees. They can deploy it as they wish — on patient care, or even in the financial markets, where quite a few physicians now work. In principle, therefore, the owners of that valuable, purely private human capital should pay themselves for its production. That physicians serve society can be acknowledged, but so do many other professions whose education is not publicly funded. Just because privately owned human capital serves the public does not make it a public good.

The more subtle and interesting question is whether an educated medical profession is a public good? I think it is and that’s why regulation of the practice of medicine by local, state, and federal governments is a good idea.

Although physicians these days seem to regard the $80,000 or so per medical resident paid from the Medicare Trust Fund for each and every resident as a law of nature, it isn’t. It’s basically the bribe that was paid to the medical profession to secure its acquiescence to Medicaid in 1965. It’s a bit ironic that such bribery should have been needed since the medical profession has benefited so handsomely from Medicare. Since the passage of the program the wages of physicians have outstripped those of lawyers, accountants, architects, and engineers by far, to the point where the average physician earns a multiple of what the average lawyer earns rather than 10% plus or minus that they earned forty-five years ago.

The reality is that the subsidy has not increased the number of medical residents (that’s been capped) but rather has increased the wages of medical educators.

The smallest reform in our subsidization of medical education that we should implement is that we should limit the subsidy to the education of physicians who will mostly be providing primary care. Other specialties can more than pay their own way.

As to what I think should really be done, my views in the area of healthcare reform are so draconian I don’t even bother airing them.