Healthcare spending amounts to just over one-sixth of GDP in the United States. Much ink has been spilled on why this is the case, but an underappreciated part of the problem is doctor pay.
Dean Baker brings this problem to light writing in Politico:
[A]n unavoidable part of the high cost of U.S. health care is how much we pay doctors — twice as much on average as physicians in other wealthy countries. Because our doctors are paid, on average, more than $250,000 a year (even after malpractice insurance and other expenses), and more than 900,000 doctors in the country, that means we pay an extra $100 billion a year in doctor salaries. That works out to more than $700 per U.S. household per year…
[W]hen economists like me look at medicine in America – whether we lean left or right politically – we see something that looks an awful lot like a cartel.
Physician licensing has much to do with this problem. By restricting supply through licensing, healthcare practitioners earn a wage premium of almost 15%, according to a 2015 report from the Obama Administration.
But Baker identifies another front-end regulation that restricts the supply of physicians: the number of slots available in medical school and medical residencies.
In the United States, the supply of doctors is tightly controlled by the number of medical school slots, and more importantly, the number of medical residencies. Those are both set by the Accreditation Council for Graduate Medical Education, a body dominated by physicians’ organizations. The United States, unlike other countries, requires physicians to complete a U.S. residency program to practice…This means that U.S. doctors get to legally limit their competition. As a result, U.S. doctors receive higher pay, and like anyone in a position to exploit a cartel, they also get patients to buy services (i.e., from specialists) that they don’t really need.
Baker offers a number of solutions, including funding more residency slots, eliminating residency requirements for foreign doctors, and expanding the role of nurse practitioners in healthcare by expanding scope of practice.
The costs of healthcare for everyone are the primary concern that Baker addresses, but it is also worth pointing out how restricting competition increases income inequality at the top. As Brink Lindsey and Steven Teles wrote in The Captured Economy,
[M]edical licensing is very effective in boosting physicians’ incomes. A 2008 study compared the salaries of American doctors to those of their counterparts in Australia, Canada, France, Germany, and the United Kingdom. Pre-tax earnings for U.S. primary care physicians averaged $186,600 (in 2008 dollars), 54 percent higher than the average of $121,200 for the other five countries. At the top of the pay scale, American orthopedic surgeons averaged $442,500, more than double the $215,500 average for the benchmark countries. Doctors overall are extremely well represented among the top 1 percent of earners, with 21.5 percent having membership in the club.
There are surely superstar physicians out there who provide immensely valuable services to their patients, and in a free market they will be compensated accordingly. By the same token, doctors shouldn’t benefit from policies that restrict competition and innovation for their own benefit.
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