I’d like to throw a question on the floor. Is healthcare cost control possible without healthcare wage control? At least within the context of reasonable levels of public health?
I used to think that it was possible but I’m increasingly coming to doubt it. There really is no working market in healthcare (other than, as it has been mentioned, by measures like medical tourism). Without a functioning market, “market-friendly” reform approaches are doomed to failure.
It strongly seems to me as though the idea that we can have healthcare cost control without healthcare wage control assumes one or more of two things:
- That healthcare providers will willingly take a pay cut.
- That healthcare providers have significant amounts of excess capacity.
I see no evidence of the latter. Indeed, I know more docs who are working too many hours than are sitting idle. If healthcare providers are at or near full capacity, if you reduce compensation for procedures, providers will have the alternatives of prescribing more procedures or raising the rates for current procedures. Claiming that providers would never simply prescribe more procedures or raise their rates denies the experience of the last forty years.
If Medicare, Medicaid, and insurance companies cap compensation by any method, providers still have the alternative of billing patients directly. That could result in a market system by default but I don’t see such a system as compatible with decent levels of public health.
I’m open to suggestion on this. Ideas?
Update
More grist for the mill. Doctor Unavailability Syndrome?
There is a new disease spreading like a cancer in doctors’ offices and hospitals throughout the U.S. I have named it Doctor Unavailability Syndrome (DUS). It is characterized by a rising shortage of doctors, both specialists and primary care, as well as the growing inability of the doctors we do have to take care of patient needs.
What good is a shiny new insurance card if there is not a physician available to see you?
This disease can be traced back to 1997, when Congress, anticipating a doctor surplus, included a section in its budget-balancing law that froze the number of Medicare-sponsored residency positions.
But instead of a surplus, a shortage soon developed, and has worsened over the years, now reaching epidemic proportions. The Association of American Medical Colleges Center for Workforce Studies just reported an anticipated shortage of 90,000 doctors of all kinds over the next decade, with half of them being primary care physicians and the other half surgeons and specialists.
I find this extremely difficult to understand. Why go back only as far as 1997? The number of physicians per 100,000 educated in the U. S. has been shrinking for decades. We’ve only maintained anything like a reasonable ratio (particularly of general practitioners) by importing doctors like mad. Other OECD countries have begun competing with us on price for GPs.
And why is a subsidy required to train more doctors? (BTW, the Medicare system has subsidized medical residencies at a ferocious level for the last forty years.)
I can understand why physicians would want fewer physicains. That’s been the profession’s policy for a century: fewer, better doctors. I read of waiting lists for U. S. medical schools and American students going to foreign medical schools for training all of the time. Are billets actually going wanting? Very puzzling.
Do we need to be rich to live well in America? Moreso than say France, where doctors are said to be happy earning much less?
I’ve had this worry that we aren’t structured for a civilized life at lower wages and this shakes out all kinds of ways. Think about public employee compensation.
Our approach, to subsidize the poor into the middle class, and have the middle class struggle to differentiate themselves as rich is failing all around us.
First, physician pay accounts for about 6% of health care spending. If US docs were paid by OECD standards, that would be reduced to about 3.5%, but OECD docs dont pay nearly what US docs do for education. Accounting for that expense, plus interest, etc., you can probably get US docs down to about 4.5%-5% of the total (I have done the math on this in a couple of different ways). While I agree that physician pay is too high in many areas, cutting it will not provide a big effect.
http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-–-health-care-workers/
The bigger problem is the spending that docs control, which ties into what happens if you try to cut doc earnings. Many of us have a fair amount of elasticity when it comes to our work. We have fixed time commitments that usually yield little income. Then, we have high yield work that provides lots of income. If we can add more work of the high yield type, we often work more. You need to remember that a lot of us worked more than 100 hrs a week in training. I dont want to do that again, but I expect to work long hours. To be complete, I should note that work ethos is changing a bit. Younger docs dont expect to work as much, but they still expect to work a lot.
So, if you cut reimbursement per procedure or test, we may be able to do more. Studies have shown that we can, to some extent, create our own demand. Docs have learned from business how to maximize earnings. That is one reason why I believe the better approach will involve reducing utilization. Part of that is having more primary care docs.
“I can understand why physicians would want fewer physicains. That’s been the profession’s policy for a century: fewer, better doctors. I read of waiting lists for U. S. medical schools and American students going to foreign medical schools for training all of the time. Are billets actually going wanting? Very puzzling.”
Since docs can create demand, more docs will not decrease total spending. Since it is the procedures they do and the tests they order which really run up costs. Look, I am getting older. I would love to work less. Suppose we increased doc ratios to the same as in Germany. That would mean my group would have about 50% more docs. My salary is cut in half, in theory (hours also). In reality, I now have the time to do, should I choose, some revenue enhancing procedures I dont right now. Regardless, the same number, at least, of procedures goes on. That is where the real costs lie. Would reimbursement per procedure go down for docs? Maybe, but then if salaries go too low, you risk no one going into the profession or people leaving for other OECD countries.
“And why is a subsidy required to train more doctors? (BTW, the Medicare system has subsidized medical residencies at a ferocious level for the last forty years.)”
Medical education costs and reimbursements is a mystery to me. I have taught students and residents for years w/o any direct compensation. Most of my fellow docs dont want to do it. Up until now, we have just been an affiliate hospital, though we have many residencies.. We are starting our own med school, so maybe I will get a better handle on it.
“If Medicare, Medicaid, and insurance companies cap compensation by any method, providers still have the alternative of billing patients directly.”
Mmmmm, maybe. This really riles up patients a lot. Docs generally avoid this, but then, they are making good money now. Hard to predict what happens if the rules change.
Steve
I think this is where Greg Mankiw’s recent article has some saliency. We’ve recently become family friends with a doctor couple, and the wife just told us that she is in the process of quitting her OBGYN practice. Reasons given: low job satisfaction, particularly E.R. duty, desire to spend more time with kids, and financial security provided by husband’s salary. She doesn’t expect that she will be capable of returning after a while. I don’t know that they sat down and did the same exact analysis that Mankiw did, but I’m certain they sat down and figured out her after tax income and weighed it against the other considerations. We have a shortage of OBGYNs in this area. And despite the assumption from commenters at OTB that those who value their time should step aside and let others do the work, I don’t see the shortage shrinking any time soon.
Anyway, the CFO at Mayo has said 70% of the high cost of healthcare is labor. At these salaries, I think physicians have to primarily be managers of services provided by others, or the most technically-demanding tasks. But I think that jeopardizes job satisfaction. If you are going to lower wages, then you are going to need to offset it with intangible improvements, of which tort reform may be one.
Steve, when you say physician pay accounts for about 6% of health care spending, does that also include physicians in those high yield work roles?
Obviously then PD, no one would have been a doctor in the 60’s with the higher tax rate … except that’s not true, is it? It was probably a more desired job then.
How many doctors were married to doctors in the 60s? It’s not simply about taxes, it’s about decisions made on the margins with multiple factors. My point is doctors won’t take pay cuts without reducing hours or obtaining other intangible benefits. (steve’s point is that doctor’s wont take pay cuts anyway, so perhaps it’s moot)
Sorry, I don’t follow. We should lower taxes on married people to keep them working? Is that fair to single income families?
I’m not making a tax proposal.
This is a tough nut to crack for sure. The problem is that I don’t really know where the money is going. I do think a key task, though, is reforming the fee-for-service system. I also think we need to train more doctors. The reason I often have to go to the ER, despite having military Tricare health insurance, is because it’s about impossible to get an urgent care appointment. Doctors seem to have zero slack time – one long appointment will screw up their schedule for the rest of the day. Specialist appointments often have to be scheduled months in advance.
Personally, I think a lot of GP work could be done by PA’s and qualified nurses and, in fact, that is increasingly the case, for me at least.
I agree with Steve (and definitely endorse the incidental economist link to anyone who hasn’t seen it – great series).
It’s worth emphasizing though that under a fee-for-service system, reducing the number of procedures is inevitably going to reduce total earnings, including provider earnings. That’s why the Mayo CFO can say what he did – switch to capitation and the vast bulk of those procedure costs become salaries. You can take those lost earnings out of future employment growth, affecting things like staffing ratios & the like, but well, then you’re reducing jobs in our #1 job engine over the last decade (not that it isn’t time for that to change, but that’s another topic). Plus you have to come up with practice models that at least maintain quality despite reduced staffing. I’m optimistic about the latter (which is part of the reason I’m optimistic about the HCR bill, despite plenty of misgivings). But there’s no pretending that there won’t be significant pain one way or another.
Well, I’m one of those who chooses to work part-time and sometimes not-at all because often it simply isn’t worth it. Taxes are only part of that equation, but I can see why many people would choose to quit careers if their spouse is making steady, reliable income.
I should add that the Mayo CFO didn’t focuss on physician’s salaries, like I have. A lot of labor costs are in administratin, but the key graph:
“Leadership is the number one factor in changing the culture of healthcare,†he said. “Cost reductions will occur when there are fewer people providing services at fewer facilities, working at a much lower pay scale.â€
http://www.healthcarefinancenews.com/news/are-healthcare-workers-paid-too-much
There’s a lot to respond to in the comments here.
First, although steve’s numbers for physician wages strike me as a tiny bit low (I calculated roughly 600,000 physicians with a mean wage of $200,000 for $120 billion and total healthcare expenditures of $1.6 trillion or 7.5%), they’re not completely off. Please note I was very careful to say “wage controls in healthcare” not merely “wage controls on physicians”. Add to that number administrators, technicians, nurses, etc. and you’re beginning to start talking about real money. Here’s a useful comparison of the U. S. to other OECD countries.
Second, my definition of cost control is pretty stringent. I don’t consider that medical costs are under control in a slow or non-growing economy unless they’re growing extremely slowly if at all. Right now healthcare cost are not only growing far faster than the general rate of inflation (i.e. healthcare inflation+non-healthcare inflation), healthcare costs virtually are the general rate of inflation. I simply don’t see how that’s sustainable. It’s certainly killing state and local governments.
Third, can healthcare costs be brought under control and a decent level of public health maintained and keep insurance companies in the picture? For-profit hospitals? I have my doubts.
One thing I forgot. I think we need to get employers out of the health care business. It’s fine if they want to offer supplemental policies, but the negative effects on labor are pretty obvious.
My solution on that front, Andy, would be to tax compensation rather than income.
Dave-Total health care spending last year was about $2.4 trillion. Remember that GDP was about $14.3 trillion. Health care spending was about 17.5% of GDP. All off the top of my head but I look at these numbers a lot so they are pretty close. I used Carroll’s numbers for total doc salaries as they correspond closely with what I have seen elsewhere AND I did my own back of the envelope like you did.
PD- My wife was a physician. She quit. My son had some issues, but it also made limited economic sense for her to work when I could work a bit more, which I did. FICA taxes do not affect my extra earnings, but they would affect hers if she worked. While conservatives concentrate on top marginal rates, FICA is what kills second earners. I think the Mayo guy may mostly be looking at inpatient care.
John- Total docs/total health care spending = 6%.
Steve
Andy- I agree that employment and health care should not be linked. Increased use of PAs is more common now, but it does not seem to be slowing down costs. I know that in my specialty, using nurses instead is usually a wash. Under some circumstances it can save money.
steve, it’s really not a tax issue per se. It’s about decision-making and the potential implications of reducing take home pay, either through some form of wage controls or increased taxation; we will likely end up with fewer doctors or fewer doctor hours. And I think it’s partly a two-income couple issue, since there is more flexibility to reduce hours/work.
FWIW, my wife and I made similar decisions when we had children and she went to part-time and I reduced the amount of work I was accepting. Focusing on the impact of marginal rates on the last dollar makes the preferences easier, but I wouldn’t go so far as to say a few percentage points here are there makes all the difference.
I had the stray thought reading SWJ today, that a part of this really just is the burgeoning cost of technology. It affects more than medicine.
http://smallwarsjournal.com/blog/2010/10/prepare-for-major-war-or-stabi/
Steve