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.

8 comments… add one
  • ...

    You had me at draconian!

  • 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.

    I might go a step further (and maybe a step back). We should subsidize those slots we have need for. It’s not just a matter of needing primary care slots, but of needing them more in particular places. I read recently that our residency slots are skewed towards some regions and away from others, specifically towards New England and away from the Mountain West. Since physicians have a tendency to settle where there residency is, this is a problem.

    So let’s focus on subsidizing residencies on where we need doctors.

    I have a conflict of interest here (my wife just signed on to be an attending physician for a residency program), but this is a statement against interest (we’re near the east coast), though only partly so (we would like to be out west, eventually).

  • That is a point too frequently ignored, Trumwill. Physicians enter the specialties that interest them, that they can qualify for, and that make the most money. They practice where they care to, where they can, and where they can make the most money.

    None of that would be objectionable if there were an actual market. But there isn’t; there are substantial barriers to entry. Under the circumstances I think we as a society should be demanding a lot more.

  • steve

    The amount of money to be saved by doing this is relatively small. It doesn’t increase the salaries of medical educators so much as it frees them to do more research and teaching. Take it away and, I predict, salaries won’t change a bit. You can’t have too much of a gap between private and academic salaries or people won’t do academics. What will happen is that academics will need to spend more time on clinical duties and less on research. Probably less on teaching also.

    That said, as I have said in the past, I favor efforts to promote primary care. Forgiving student debt, increasing PCP salaries or whatever. My new hires are coming out with 200k-300k worth of debt. It is a lot easier to handle that on a specialists salary than a PCP.

    As an aside, geography matters a lot. Salaries vary widely for the same kinds of jobs. Good quality people often bypass quite a bit of extra money to live where they want.


  • Andy


    The problem with academia vs research vs “doing” isn’t confined to medicine. The difference is that few fields receive the kinds of government benefits that medicine does.

    That said, there will always be tradeoffs.

  • steve

    Andy- Aye, but then Dave is making the case that medicine, in toto, is a public good. If that is the case, then we should spend wisely and try to understand the consequences of change. Cutting the subsidy to teaching institutions won’t affect salaries much. It will affect other things. Are those the things you really want to change?


  • Andy


    IMO, tinkering with the system won’t work – I would prefer a substantial reform to medical education.

  • ...

    I’d love to know what draconian measures Schuler has in mind….

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