09 September 2009

Is Doctors' Income the cause of health care inflation?

Ezra Klein - The Provider Problem
Medicare keeps costs down somewhat better than private insurers, though not as well as private insurers did in the '90s, and they do it by paying providers less money. Providers hate them for it, and that's why doctors and hospitals and drug companies and device manufacturers have been so aggressive in opposing a public plan able to use Medicare rates. It's also why Medicare's growth rate is totally unsustainable -- Congress keeps delaying the cuts in doctor's payments that the Medicare law requires.
Ezra has an interesting post in which he posits that the problem in health care economics is that the rate of inflation of health care persistently exceeds the general rate of inflation.  Fine; I do not think anybody is in disagreement on that point any more.  He goes a bit further, wrongly, I think, in implying that the solution is just to pay doctors less.  

The background here is that in the late '90s, Congress decided to impose a cap on how much medicare expenses for physician services could increase in any given year, using a complicated formula called the Sustainable Growth Rate, which was indexed to GDP growth.  I should note that for some reason, Congress decided not to cap the increase in expense on hospital services, but to let the growth of Medicare Part A accelerate unrestrained.  (The hospital industry must've had better lobbyists.)

The SGR ran into trouble immediately, and required pay cuts for physicians, and Congress repeatedly caved and canceled the pay cuts.  So, Medicare Part B grows year over year, at a rate ahead of that of inflation, and the logic seems simple: we need to pay physicians less!

But that ignores the fact that much of physician's revenue does not go to that physician's income.  Most doctors (ER docs being an exception) have offices to maintain, nurses and assistants to pay, healthcare premiums for this employees, in addition to the malpractice insurance and billing expenses.   Medicine is not a low-overhead game any more!  My gut feeling was that physician income has been stagnant-to-declining over the last decade.

So I went to the Bureau of Labor Statistics and I manually pulled the data on physician income over the 1999-2008 timeframe, and the inflation rate for the same time span and saw that I was more or less right:
physician income vs inflation
Note that for the first six years, physician income was less than inflation, and 2006-7 was only a little bit above the overall inflation rate.  Also note that for two years physician income was actually negative.   2008 was the only year in which physician income increased faster than inflation.

A note as to methodology: the BLS tracks doctor's income by specialty, not as a single profession.  I pulled the data for General Internal Medicine, Family Practice, and Surgery, and averaged them.  Including surgery, unsurprisingly, greatly improved the income figures.  Internists' and Family docs' income lagged inflation every year but 2008.  This was not weighted, either -- there are many more Internists and FPs than surgeons, while I weighted them equally.  (Also, the BLS changed data collection methods in 2002, creating a spurious increase of 33% that year, so I threw out that year and interpolated for the above graph.)  This is not a rigorous analysis, but it gets the point across that individual physician income has not been the driver of overall healthcare inflation.  If anything, I think these methods tend to understate the degree to which physician income has stagnated during this period.

So why have global physician expenditures gone up so fast during the last ten years when physicians are, by and large, not seeing the increase in their bottom lines?  Several reasons, I think:
  • As overhead costs increase, doctors squeeze more work into the day just to keep up with rising expenses.
  • As the baby boomers age, and as lifespans continue to increase, patients are older & sicker, and physicians appropriately provide more intense care to this needier population.
  • As new technologies, procedures and therapies are developed, physicians employ them more, generally at increased cost.
  • For Medicare in particular, the graying of America simply means there are more people enrolled in Medicare.
So while doctors are providing more services, the increases are in low margin services or the increases are consumed by increased practice expenses.   I am sure there are more factors as well.

So, Ezra's suggestion that simply paying doctors less (i.e. implementing the SGR-mandated cuts) would have some effect on reducing the global expense for physician services, it would do little to change the trendline towards increasing costs.  Put another way, it would lower the setpoint of the curve without changing its slope.  It would also, incidentally, have a dramatic effect on physician compensation, since the other costs of a medical practice are fairly inelastic, and the lost revenue would come directly out of doctor's salaries.

I don't have a solution to the costs problem, and I am not sure anybody else does either.  Cutting hospitals' reimbursement would have terrible effects; hospitals are under tremendous economic stresses as it is, and I know most hospitals have razor-thin profit/surplus margins.  Medical devices are expensive, but they are so critical to the improvements in health care that I do not think anybody has the stomach to cut them.  Pharma probably should be cut, but their lobby has defended them very well.  There's no good answer.

But it is overly simplistic to think that doctors' compensation is at the root of the runaway costs problem.


  1. Ezra is a tool. The demonization of the fragmented, politically diverse physician bloc continues.

  2. Ironic that I just overheard the chief of anesthesia telling a couple of his colleagues that they might, if everything goes well, receive their first raise in salary this year. Last salary raise for them was five years ago.

  3. Ironically, those are many of the arguments in favor of a broad single-payer system in which physicians are either explicit or de facto employees of the government, since it would offload from their budgets many of their expenditures, leaving their income a more "pure" economic question determined by the government rather than leaving income subject to multiple, uncontrollable forces.

    I imagine the mere suggestion gets everyone up in arms. Nonetheless, it's worth reiterating that in any capitalistic system you must bear risk to realize reward -- for physicians, those risks have been increasingly rapidly with the graying of the population and the surge in importance of expensive technology / pharmacology over the past 50 years. If you want to keep the current structure's reward, you'll have to bear its risks.

  4. Liam, this post uses flawed logic. Internists and Family physicians have had their market killed over the last 10 years with the increasing penetration of mid level providers. This competition has not been the case for the sub-specialists.

    Anesthesia went through this market adjustment a number of years ago with the CRNAs

  5. And "I don't have a solution to the costs problem, and I am not sure anybody else does either."


    Increase consumption taxes on the things that cost us so much money in the first place

    1. Motorcycles
    2. Guns and bullets
    3. Junk Food
    4. (More) alcohol and tobacco taxes on CHEAP alcohol and tobacco- let's get them to Sweden level taxes
    5. ATVs (why we let 11 year olds drive these things without helmets at 40mph is beyond me)
    6. Bicycles and Ski tickets (this one would be personally unpopular)
    7. Table saws ;-)

  6. Max,

    Just a for the record: single payer would not change this factor (the overhead problem). Canada has single payer, and in it the docs are still self-employed and must bear the overhead of business. This is, BTW, one of the reasons I am not a huge fan of single-payer.

    Socialized medicine, like the NHS, *would* offload the overhead concerns, but, well, there are other problems there, aren't there?

  7. Thai,

    this post uses flawed logic. Internists and Family physicians have had their market killed over the last 10 years with the increasing penetration of mid level providers. This competition has not been the case for the sub-specialists.

    I don't see the relevance. My point was that incomes are stagnant. Midlevels (as often as not) enhance physician incomes. The CRNAs hurt anesthesiologists because it reduced the number of jobs in the market for anesthesiologists, but the midlevels in primary care came about because of a lack of doctors willing to fill that role.

  8. Liam,

    Yes and No. Whenever you look at things like this you have to look at it from several perspectives, no just one.

    Yes- Individually mid-levels enhance the income of the physician supervising them.

    Yes- mid-levels entered the market as a result of shortaged

    No- globally, mid-levels increased the supply of labor available to provide primary care and hence kept down pressure on the need to raise primary care physician wages in exactly the same manner as CRNAs did with anesthesiologists. (e.g. the shortage would have increase wages of internists a long time ago were it not for mlps)

    fwiw, if we ever get mid-levels doing (say) cardiac caths (which I am sure they could go), or colonoscopies or reading just chest xrays, etc... the same will happen with other specialists

    AND the net effect on the system has been that the greater complexity cases are now seen more by MD- this has increased the salary of the remaining MD

    ... Indeed mlps are one of the main reasons one cannot compare physician salaries between the US and other OECD countries. The acuity mix is much great for (some) American physicians vs. their European counterparts.

  9. Should the blue line be physician income (in which case, it makes no sense on the Y axis) or change in physician income?

  10. Anon,
    Yes, the blue line is *change* in physician income.


    mid-levels increased the supply of labor available to provide primary care and hence kept down pressure on the need to raise primary care physician wages

    This is the heart of your error. Most physicians are not employees receiving wages which are subject to typical market forces. Most docs are proprietors/partners in small practices which rise and fall based on local factors regarding payer mix & insurance company power. In an inverse relationship to the typical wage situation, the regions that physicians most want to work in tend to pay *better* and the regions that docs avoid pay worse. The classic employer model would dictate the inverse -- the wages would be depressed in high-demand areas b/c employers could always find someone to work cheaper, and in low-demand area employers would have to offer a premium to workers to come there.

    Now this model *does* apply to some physicians who are hospital employees, academic or large group employees. That's not my point. I was referring rather to the larger number of docs who are in private and small group practice.

  11. Liam, what does fee for service vs. employee model have to do with this?

    MLPs can be hired by either an Internist/family physician directly (and many I know do) or by an organization that hires a internist/family physician who employs the doc and mlp both as an employee.

    This does not not change the fundamental effect on market forces

  12. And while I understand this issue concerning payor mix and geography very well- my group has 6 facilities, 2 suburban and 4 rural- I further have a hard time seeing how it makes your point that mlps do not keep pressure on primary care physician wages.

    Seems one of those "true true and unrelated" kind of things

  13. Thanks for this. Very nice work. I don't have a solution to the cost problem either, but the programs detailed in the npr story below reportedly save $5K/pt per year. That's a pretty staggering savings, as well as providing personalized home care to seniors. I got to participate in one of these programs during my nursing education. There are also journal articles detailing the health benefits of such student staffed home care services. Something to think about....


  14. You can only cut doctors' pay so much before it's going to push the market the other way--fewer will be willing to take on the liability and the med school debt for less money than you can get with a four year degree and some hard work. Then access to care will decrease (and, potentially, be worth more money).

  15. I'm not a doctor, just an office monkey, so my .04 (inflation) is coming from the perspective of the patient:

    Doctors, nurses, etc. shouldn't be paid less, but what should occur is a re-evaluation on how hospitals and doctor's offices bill their patients on treatment -- this ranges from chemo treatment to ibuprophen. It is out of control.

  16. "Nonetheless, it's worth reiterating that in any capitalistic system you must bear risk to realize reward -- for physicians..."

    Max Where do you live? The american system of medicine/reimbursement is NOT CAPITALISTIC. Rates are set by medicare and keyed off by medicare by private insurance.

    Throw on top of this your other uneducated statement
    "since it would offload from their budgets many of their expenditures"
    comes without any clear knowledge of the fact that by far the largest expense in most MD practices is the office itself. I don't see ANY proposal discussing offloading of those expenses.
    In conclusion: Stick to law.

    The real problem is thread shows that Ezra/Max are clueless as to the real cost driver in medicine. The expenses of caring for the chronically/acutely ill in the last months-yeares of their lives. The western europeans have a rationed system that controls costs (imperfectly if you follow their systems). Depending on the system, people of advantaged age don't get open-ended dialysis forever. They don't get CABG's in their 90's. Open ended chemo with the newest drug doesn't happen. People don't sit on vents in futile situations in the ICU until they code and die while the docs try ot convince families of the futile situation.
    That is the real cost driver of medicine. If Ezra actually spent time in the hospital instead of being a professional wonk (and I would argue a worthless, self-serving, career-propagating wonk) he will get it. But he doesn't appear to me the type to get his hands dirty.
    People, very simply, if we want to get a real handle on costs in this society, the answer lies in having a rational debate about rationed care. THEN TO FOLLOW THROUGH ON THE DEBATE RESULTS. Until then, we all just verbally pissing in the wind.

  17. Thanks, Shadowfax. You have crystallized my thoughts eloquently. All true. As an internist, my rate of inflation of overhead far outpaces the rate of rise of reimbursement. A cut in reimbursement rates would be devastating as we have about a 50% overhead; the proposed 21% cut to our clinic would mean a 42% cut to physician salary.

  18. There is never inflation in the medical field. Everyone has many illness and has to come to doctors for treatment so there is no question of inflation for doctors.

  19. Physicians make too much to begin with. Not receiving increases in income begins to bring their incomes where they should be. What justifies their high incomes to begin with?

  20. Law Malpractice insurance rates depend on issues that vary by company. You need to discuss your particular circumstances with an insurance broker in order to find the best rate for your particular needs.

  21. This article gives the light in which we can observe the reality. This is very nice one and gives indepth information. Thanks for this nice article. doctors in irmo sc


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