Are U.S. physicians overpaid?

Filed Under (Health Care) by Nolan Miller on Sep 28, 2011

Let me begin by stating that the answer to this question is “no.”

Now that I’ve headed off the slew of angry calls from my family, the reason why I’m writing about this question is a recent article in the journal Health Affairs by Miriam Laugesen and Sherry Glied entitled “Higher Fees Paid to US Physicians Drive Higher Spending For Physician Services Compared to Other Countries.”  The study compared fees paid to general practitioners and orthopedists in the US with those paid in Austrailia, Canada, France, Germany and the UK.  They summarize their findings as:

“Public and private payers paid somewhat higher fees to US primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. US primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services, or tuition expenses, were the main drivers of higher US spending, particularly in orthopedics.”

In light of this finding, one might be tempted to conclude that physicians in the US are overpaid relative to other countries.  However, while it is true that physicians in the US make more than physicians in other countries, in order to interpret this finding it is critical to note that high earners in the US in general make more than high earners in other countries.  Relative to other countries, the US income distribution is more skewed, meaning, for example, that the highest 1% of earners in the US make more than the highest 1% of earners in other countries.

Now, we might ask ourselves, what is the relevant comparison group for a US physician?  A US college student who is deciding whether to be a physician doesn’t compare the income that could be made as a physician in the US with the income that could be made as a physician in German.  He or she compares the income to be made as a US physician with the income to be made as a US lawyer or MBA.  In other words, the right question isn’t whether US physicians are paid too much relative to German physicians, but whether US physicians are paid too much relative to others at the top end of the US skill/eduction/income distribution.  With respect to this point, the answer seems to be that incomes for US physicians are largely in line with incomes to other high earners in the US.  (Not to be too hard on Laugesen and Glied, they discuss this point at the end of their article.)

The issue of how physician incomes fit into the broader income distribution is discussed in a paper from earlier this year by David Cutler and Dan Ly that appeared in the Journal of Economic Perspectives.  They compare incomes for general practitioners and specialists to the income of “high earners,” (people in the 95th to 99th percentile of the income distribution) in 13 other OECD countries.  In the US, this ratio is about 1.37 for specialists.  In the other OECD countries, the ratio ranges from 2.56 in the Netherlands to 0.8 in the UK, with the average being 1.45.  For GPs, the ratio of income for US physicians to that of other US high earners is 0.92.  In the other countries, this GP ratio ranges from 0.68 in Norway to 1.41 in Canada, with the average being 0.98.  Thus, in both cases, US physician earnings seem to be in line with earnings of high earners, with the US being slightly below the OECD average for both GPs and specialists.

So, what do we make of the two studies?  Well, Laugesen and Glied have a point that high physician incomes appear to drive the high cost of healthcare in the US relative to other countries.  But, the reason why US physicians earn so much isn’t because “the system is broken,” they “take advantage of the system” or some other nefarious motive.  Rather, US physicians earn a lot because high earners in the US earn a lot.  So, the skewness of the US income distribution is in part responsible for the high cost of health care in the US.

This point is potentially important for understanding how we might reduce healthcare costs in the US.  Often, proposals to reduce Medicare spending focus on reducing provider payments.  However, if this reduces physician incomes we might expect that in the long run, as physician incomes drop relative to other professions, we’ll have fewer physicians and more lawyers, MBAs, etc.  As long as wages in these competing professions remain high, it will be difficult to squeeze down on physicians too much without driving them out of medicine.  If the highest-ability students are the most likely to move to a different profession, we might find that those who still choose to be doctors are not as good: the overall quality of the talent pool of young physicians might drop.  At the same time, to the extent that this reduced physician supply leads to shortages, it will put upward pressure on physician fees, and we’ll be right back where we started from.  In short, it is unclear that we can reduce healthcare costs too much by reducing payments to physicians.

Is U.S. Health Care Efficient?

Filed Under (Health Care) by Nolan Miller on Oct 15, 2009

In the past weeks, I’ve argued that the US spends more than other countries on health care.  This fact is not in dispute.  However, one could argue that, if the increased expenditure on health care is buying more health, then the US system might still be efficient.  We’re a rich country, and we choose to spend more on health care and get more health because of it.  If true, there would be nothing wrong with spending a lot on health.

There are a lot of academic studies on this point, and maybe I’ll discuss some of them in future weeks.  (My favorite is a paper by Alan Garber and Jonathan Skinner that appeared in the Journal of Economic Perspectives last year entitled “Is American Health Care Uniquely Inefficient?”  The short answer is, yes.)  Today, I took some time to play around with the OECD health data.  The OECD is a group of 30 wealthy, developed countries.  If we are going to compare ourselves to other countries, then the OECD is probably the right group of countries to look at. 

My findings are in four charts.  I apologize that the country labels blend together, but the US is conveniently so far from everyone else that it is always easy to identify it!

The first compares per capita GDP to per capita health care expenditures.  Here, we see what we expect to see.  The US spends more per capita on health care than the other OECD countries.  One might expect that wealthier countries spend more on health care, and the trend line shows that this is the case.  But, the US is way above the trend line, indicating that our expenditure is more than can be accounted for simply by our high per capita GDP.


The second chart plots life expectancy from birth (2005) against per-capita health expenditure.  Although the trend line shows that, in general, higher health expenditure is associated with higher life expectancy, the US is well below the trend line.  Even if you don’t believe in the trend line, it is clear that life expectancy in the US is no larger than it is for other wealthy countries, and the US clearly spends more on health care.


 The third chart looks at infant mortality per 1000 live births vs. per capita health expenditure.  Here, the US is well above the trend line, suggesting that our extra health expenditure is not associated with lower infant mortality.


The final chart compares something called “Potential Years of Life Lost” (PYLL) to per capita health expenditure.  The OECD explains PYLL as:

PYLL is preferred as a summary measure of premature mortality since it treats the life year saved – rather than life – as the unit of output.2 In effect, in the calculation of PYLL deaths are weighted according to their prematurity preceding an age limit – 70 in this study. With this age limit, the death of an infant (70 life-years lost) will be given fourteen times the weight given to the death of a person aged 65 (5 years lost). Conventional mortality rates, on the other hand, implicitly give the same weight to all the deaths irrespective of age. Usually, for cross-country comparisons, the number of PYLL is expressed as rate for 100 000 population.

Thus, PYLL is a measure of mortality that gives greater weight to young people who die than older people.  In general, increased expenditure is associated with a decrease in PYLL.  Once again, the US is well above the trend line.  Here’s the chart.


***NOTE: although graphically there appear to be trends in all cases, in the case of infant mortality and PYLL, the statistical relationship for the crude regressions is boarderline significant at best***

So, what do we make of this?  What is clear from the data is that the US spends more on health care than other countries but our results do not, at first glance, appear in line with this increased expenditure.  Before we make too much of it, however, we should all recognize that these charts do not tell a causal story.  If, for example, Americans are sicker than other people, it may be that we have to spend as much as we do in order to achieve the rather poor results illustrated in these charts. If we were to reduce our expenditure to a level more in line with other countries, we might do even worse. If that were the case, I’d be fine with the data.  Maybe we should even be spending more.

In my opinion, the US is so far off the trend line on so many different dimensions of health quality that I tend to believe there is something about our health production function — the way we finance and deliver care in this country — that leads us to spend money without appreciable results.  There seem to be many pieces to the puzzle – overuse of technology, paying for procedures instead of paying for health, defensive medicine, and more.  There probably isn’t a single source, but rather a lot of smoldering fires that combine to create a lot of smoke. And, given that every player in the health reform debate has their own turf to protect, this makes starting to attack the problem all the more difficult.