In response to Government makes health care more expensive and therefore it is unreasonable to withdraw subsidies, a commenter wrote
Is the government responsible for Baumol’s Cost Disease?
Is the government responsible for extreme concentration of wealth?
The bulk of the problem is a lot simpler than you, Vance, and most others in the public square make it out to be.
Baumol’s Cost Disease says that industries with no productivity growth, such as string quartets performing live, have to compete for workers with industries that have high productivity growth and hire workers to write code for sticking ads into Facebook or press the “start” button on a fully automated factory.
“Drivers of health care expenditure: Does Baumol’s cost disease loom large?” is a 2012 paper by economist Carsten Colombier. He concludes that the effect is minor and mostly spending on health care has been “quantity-driven” (i.e., people are getting more tests and procedures, taking more drugs, etc.).
What about an informal analysis? “Obamacare Isn’t Stopping Doctors’ Incomes From Soaring” (Fortune, June 10, 2016) says
Far from flattening, as some Obamacare experts predicted, or even waxing in low-single digits like salaries for contractors, lending officers, beauticians, and most other workers, pay for doctors is surging.
Dermatologists, cardiologists, urologists, among others, are reaping double-digit increases that lift their salaries to the $500,000 a year range, and that’s not including substantial performance and signing bonuses, relocation allowances, and even full payment of their med school loans.
A system that fuels demand with huge subsidies, yet systematically restricts the supply, is a textbook formula for fast-rising costs. No illustration is more vivid than the problem with doctors’ pay, a category that accounts for 22% of all U.S. healthcare spending.
On average, family doctors got a $27,000 raise in the past year, from $198,000 to $225,000, for a 13% increase. Doctors in the two other primary care categories, internal medicine and pediatrics, also had great years. Each garnered 15% bumps to $237,000 and $224,000 respectively.
… general surgeons at $378,000 up 12%; dermatologists at $444,000. also up 12%; urologists at $471,000, up 14%; OB/GYNs at $321,000, up 16%; otolaryngologists at $403,000, up 21%; and non-invasive cardiologists at $493,000, which have seen their pay rise more than 30% above what they have been paid on average over the past three years. Orthopedists and invasive cardiologists also got inflation-beating increases of 4% and 5% respectively. On average, both specialties pay well over $500,000 year in salary alone.
[Note the spread between primary care and specialists. An American who has sex with a specialist earning $500,000 and collects child support should have close to the same after-tax spending power as an American who goes to medical school and works as a primary care doctor (works better in Massachusetts than Minnesota, though!). (The American (or foreign visitor) who has sex with two or three different cardiologists can have the same spending power as a cardiologist, if the state is chosen correctly.)]
If a fresh-out-of-training specialist can earn $500,000 per year by going to an “underserved” area of the country, how can we attribute this to competition with manufacturing employers? Intel gets tremendous productivity per worker out of its fabs, but how many Intel workers get $500,000/year?
If high salaries for people working in health care are primarily due to competition with other industries, why are those salaries going up at a faster rate than what other industries pay?
Nurses at one of our local hospitals are preparing to strike (Boston Globe):
Both sides agree that nurses wages’ at Tufts are below those of other Boston hospitals. Tufts officials say that they want to rectify that by offering a 10.5 percent raise over about four years to nurses at the top of the pay scale.
All other nurses would receive a 5.5 percent pay hike over four years, in addition to 5 percent annual step raises, which are already built into the contract.
The average pay for a full-time nurse at Tufts at the top of the pay scale is $152,000, according to the hospital.
Nurses are able to unionize and strike for higher pay, something that is unusual in the market portion of the U.S. economy. If patients would go to a cheaper non-union hospital rather than pay for these higher union wages, it wouldn’t be possible. So plainly there is some non-market factor in operation that makes consumers indifferent to the prices that this hospital charges and/or unable to go elsewhere.
Finally there is the patient experience. If we’re old we remember the days when seeing a doctor meant actually seeing the doctor and possibly a receptionist or nurse. Now the “doctor’s office” is stuffed with non-doctors embroiled in various paperwork tasks.
Readers: Can we relax and not worry that we spend 4X the percentage of GDP compared to Singapore or 2X compared to Europe on health care?
Related:
- my personal Health Care Reform article, in which I ask “Who Voted to Spend All of Our Money on Health Care?”
A refresher:
https://philip.greenspun.com/blog/2017/03/24/does-it-make-sense-for-the-government-to-be-responsible-for-health-insurance-given-how-much-the-government-has-distorted-the-market/#comment-280813
A shortage of doctors, among other things, prevent a competitive health care market and keep costs rising. SV hopes that AI can subvert doctors and will be the “solution” to health care. It won’t:
https://twitter.com/EricTopol/status/888816786698756096
http://jamanetwork.com/journals/jama/fullarticle/264576
> Readers: Can we relax and not worry that we spend 4X the percentage of GDP compared to Singapore or 2X compared to Europe on health care?
Tyler Cowen says yes: https://www.bloomberg.com/view/articles/2017-07-20/spending-a-lot-on-health-care-is-the-american-way
I say no. This country’s misallocation of resources over the past several decades into inefficient housing, ineffective education, and inefficient and ineffective healthcare, (not to mention finance, which has exacerbated all of these), have cost us dearly.
Brian: Thanks for those links. I wonder if Tyler Cowen has tried to get an appointment with a doctor lately. He says “As a nation, we are relatively intolerant of long waits”! (my latest appointment for a 20-minute physical with a local primary care doc took 2 months to schedule on an “earliest available” basis; this might take a day to schedule in France?)
I also wonder if he has been to a McDonald’s. I don’t see how anyone can go to McDonald’s and then to a hospital or clinic and not see the spectacular waste and mismanagement.
Brian: Hey, thanks for that link! I completely forgot that I made the same point as Vance.
Oops, JAMA link got truncated:
http://jamanetwork.com/journals/jama/fullarticle/2645762
I can see why Baumol’s Cost Disease might impose a floor on things that can’t be automated/mechanized (Massage therapy, singing telegrams) but it can’t possibly explain doctoring. Shouldn’t the excess high-iq labor freed up by automating aspects of computer science and science relieve some of the scarcity of doctors? Only rigid cartelization can explain this not having happened.
I think most of these people with smug views on Obamacare and the US healthcare system are people who don’t buy their own insurance, receive Cadillac plans through their or their spouse’s employer. My experience in NYC is about the same as Phil’s — very difficult to find a US educated MD who will accept the crappy HMO policy that is the only thing on offer for the self employed and then difficult to schedule an appointment.
This is a gnarly problem because it begs to be allowed to collapse of its own weight (not just Obamacare, the whole healthcare distortion), but we can’t do that for humanitarian reasons. A good start would be un-electing the whole Congress and trying for some people willing to even up the legal landscape (doctor cartels, carve-outs for hospitals, pharma price support, etc.)
Jack: I have a “silver” plan that seems to be accepted by virtually any provider in the Boston area. So the waiting times would be similar for anyone else here in Massachusetts. The U.S. has fewer doctors per capita compared to the UK, France, Italy, Spain, or Germany (see http://www.who.int/gho/health_workforce/physicians_density/en/ ) and that, combined with near-universal insurance, seems to result in epic wait times except for those who pay up for “concierge medicine” (but even that won’t get them into a specialist quickly, I don’t think).
Wow! I picked the wrong career. Due to a couple of layoffs and blown opportunities, the “Great Recession,” and crushing competition, my middle-management salary is exactly the same today as it was in 1998 before I did my Top 20 MBA.
Ms.: Almost any career other than medicine is the wrong choice. Playing the Silicon Valley startup lottery for a 10 percent chance of being able to afford a 2BR house in that area? Ridiculous compared to studying medicine and earning $500,000 per year in a part of the country where a house costs $500,000 or less. See http://philip.greenspun.com/blog/2017/03/01/beaver-creek-for-beginners/ for the story about the surgeon I met who lives in the Vail Valley, “a full-time adult playground” in his words.
Paradox: It is very hard to make high-achieving college students to get interested in the medical career. I completely failed doing that. All doctors I know suggest that medicine is not a promising filed and it is very hard to be a doctor without tort reform. I guess that they can be frustrated or try to limit competition or both. But what college students are being told to skip on such lucrative occupation? Maybe they are just being to idealistic? In this case all these public statements to ‘change’ to non-profit businesses of past 8 Obama years did much real harm to the society as whole and cost us a lot of real money and worsening health care, not just in terms of impossibly priced health ‘insurance’ plans.
@philg: One doesn’t want to play the lottery, one wants to run the lottery. Qualifying for that 500K surgeon’s salary first requires a decade of very hard work. In finance one can start earning straight out of a much more fun and relaxed college experience.
Neal, I think one of the main and true points of this post is that occupation of medical doctor is not a lottery. Plenty of other occupation require hard work but without guaranteed return.
Anonymous: Anyone with the brains and drive to get through medical school should be able to do better pay wise on Wall Street without taking on a lot of personal risk. However, in terms of where to live a physician would have more choices available.
Let’s not forget the option of becoming a dentist. Training seems quite expensive (is overseas an option?), but when you are done, you don’t have to try to buy a house in the NY metro area, LA, or the Bay Area. Great pay and work anywhere.
In addition, dental hygienists are reportedly making $90k a year, with 2 years of schooling.
Just brainstorming here…
Neal, it is ridiculous: you give precise street name where success with less work is not a lottery. Do you have full street number, I will sure apply for my rightful share on belonging to that address?
Neal: No question that your typical family doc could have made it to Goldman Sachs partner. You just have to want it!
@philg: Your typical family doc does not clear $500K per year.
Once you are into medical school there may not be a lottery as far as how much you will make. But there is still the lottery of being accepted to medical school and if you are not what exactly do you do with your biology degree?
In reply to Neals comment I’d estimate that at least 1/4 of medical school graduates could have gone on to far more lucrative jobs on wall st.
Also, though a doctors salary is great, is doesn’t have the potential of other jobs to suddenly increase drastically.
>But there is still the lottery of being
>accepted to medical school and if you
>are not what exactly do you do with
>your biology degree?
A pre-med undergraduate career is good preparation for an allied profession (e.g. physician’s assistant, nursing, pharmacy, physical therapy) which also pay well (but not Dr. well) without a lot of risk.
Doctor profession potential is great: I have worked for software companies owned by doctors and have friends working for other companies owned by doctors. Private hospitals provide doctors with great earning potential and they have opportunity to do truly ground-breaking and fulfilling work. I think people over-estimate Wall Street potential: 1) address means you have to be there and lifestyle is not great 2)truly few can make partner in a big bank and those often grow disturbed and injured personally 3) if discounting ownership it is better be a trader financially, but usually those positions are too based on connections. I have seen dozens of burned-out cubicle dwellers who used to be traders and few very successful, in better position than a junior partner or managing director. Algorithmic and quantitative trading brings opportunities but too actual analysts (not owners) are not exactly on dermatologist level. And now it requires large assets under management pools to make money with risk-averse algos. Point: if ability is there and hard work is invested, expected return is much better for a doctor without any connections than a wall street jockey.
I know a couple of borderline mathematical geniuses that could belong (and did belong) in FIelds medal laureates breeder tier working for well established hedge funds and proprietary trading farms respectively and on very good year they almost match what a general surgeon makes regularly. How many intelligent, not doped, hard working people could match their geniuses? This post could serve as an epitaph to our society. It shows that nobody considers careers in science, engineering, manufacturing, business development, military as something that could bring prosperity for new generation.
As it happens I know four UC class of 2012 graduates who did the experiment for us. One went into engineering, one accounting, one medicine, and one investment banking. The physician is about a decade from catching up to the (cumulative) earnings of the engineer and the accountant and is on track to catch up with the investment banker approximately never. The investment banker IS very smart, but they are all very smart.
Medicine does pay well and offers a stable low risk career with the option to live about anywhere (with the right choice of specialty). However, it is not where I would point the truely mercenary. It requires a lot of expense, hard work and long hours at the beginning and many specialties are stressful and require long hours even after training is done. Of the four I’ve mentioned, the physician has worked the hardest since graduating high school (by far).
Neal: I’m glad that your investment banker friend is doing well. However, http://www.mergersandinquisitions.com/2016-investment-banking-bonus-predictions/shows that only a few people at the top of the Wall Street pyramid out-earn the AVERAGE dermatologist. By definition, not everyone who goes into the financial services industry can be at the top of the pyramid. And remember that the dermatologist who feels the need to earn substantially more than $500,000 per year can always work Wall Street hours to get up to $1 million per year or open a few laser hair removals and push beyond that.
[The same link contains an amusing prediction: “If Trump wins the U.S. election in November, I could easily see financial markets crashing because of all the uncertainty around his positions and policies.”]
@philg: A dematologist substantially out earns the average physician.
Neal: Yes. But let’s circle back to the original posting. Is the dermatologist worth 3X as much as the primary care doc because the dermatologist would be paid 3X more by a competing industry? If not, the dermatologist’s high salary cannot be attributed to Baumol’s Cost Disease.
philg: I don’t know enough about BCD to say one way or the other. You are probably right.
Separately: When comparing salaries don’t forget to account for the cost of medical school (carried for over a decade) and the opportunity cost of training for over a decade.
Two years ago, my accountant expressed remorse that his son decided on medical school. “Doctors work way too hard for their money.”
Neal, your UC engineering 2012 graduate is paid peanuts if 2012 medical student who is just through his mandatory internships and is with medical school debt is about to overtake the engineering graduate’s earnings. Check in 5 – 10 years.
Neal, phrase smart investment banker is an oxymoron. Not sure what meaning you put into it. Usually it is reserved for clerks or managers who do mergers and acquisitions and stock/bonds issue for corporations and municipalities. Not exactly top intellect position. Good connections, suit and long hours can help but most of them paid less than a dermatologist and often they do things that border on fraud, recall record IPO bubble settlements and some municipal bonds scandals.