Are American Doctors Overpaid?

Doctors_Money-300x200American doctors are vastly overpaid when compared to their peers in other advanced nations, according to Matthew Yglesias in Slate.

The last time the OECD looked at this (PDF), they found that, adjusted for local purchasing power, America has the highest-paid general practitioners in the world. And our specialists make more than specialists in every other country except the Netherlands. What’s even more striking, as the Washington Post’s Sarah Kliff observed last week, these highly paid doctors don’t buy us more doctors’ visits. Canada has about 25 percent more doctors’ consultations per capita than we do, and the average rich country has 50 percent more. This doctor compensation gap is hardly the only issue in overpriced American health care—overpriced medical equipment, pharmaceuticals, prescription drugs, and administrative overhead are all problems—but it’s a huge deal.

Doctors aren’t as politically attractive a target as insurance companies, hospital administrators, or big pharma, but there’s no rational basis for leaving their interests unscathed when tackling unduly expensive medicine.

Do you really want your doctors motivations to be financial? I want my doctor to be motivated by healing me and keeping me healthy, not by the money from the procedures and drugs he orders for me.

Right now, the incentive structure for doctors and health care organizations is simple: the more procedures the more compensation. My recovery or overall health does not factor in, providing I do not sue for malpractice.  To ensure patients do not sue, doctors order more tests than are necessary, creating a double incentive for unnecessary procedures.

For a stunningly in-depth evaluation of how hospitals set prices for their services, check out Time’s cover story, Bitter Pill. You will be angry.

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12 Responses to Are American Doctors Overpaid?

  1. I was going to blog about that Time article but it was pretty long and I didn’t have enough time to read it. I’d like to add that as I mentioned in my Forbes post doctors order more tests because they don’t want poor survey scores.

  2. johnhaskell says:

    Bloomberg, 9/16/2009

    President Barack Obama tapped into a large vein of public support when he suggested recently that he is open to reforming medical malpractice laws. It’s common currency in the U.S. that litigation drives medical inflation by forcing doctors and hospitals to resort to “defensive medicine,” overtreating patients to avoid lawsuits.

    The evidence suggests a much smaller effect. Study after study shows that costs associated with malpractice lawsuits make up 1% to 2% of the nation’s $2.5 trillion annual health-care bill and that tort reform would barely make a dent in the total.

    A comprehensive new report from Northwestern’s Kellogg School of Management, using a database of employer-sponsored health plans covering 10 million Americans, looked at the impact of tort reform measures already enacted in more than 30 states. The authors concluded that comprehensive, nationwide reforms would lower overall health-care costs by 2.3% at most. “That’s significant, of course, but still fairly small,” says Kellogg professor Leemore S. Dafny, a co-author of the study. As President Obama told a joint session of Congress on Sept. 9: “I don’t believe malpractice reform is a silver bullet.”

    Doctors see things differently. They pay malpractice premiums that can run up to $250,000 a year for specialties such as neurology or obstetrics. It’s “a huge issue for us,” says Dr. Steven M. Safyer, CEO of Montefiore Medical Center in New York. “I would say about 5% of our costs are directly attributable to malpractice premiums and another 5% to defensive medicine.”

    A 2004 study by the Congressional Budget Office came up with much lower figures, however. The CBO estimated that malpractice premiums and awards to patients represent less than 2% of overall health-care spending. The CBO also concluded that any reductions in medical overtreatment from tort reform would be negligible. “So-called defensive medicine may be motivated less by liability concerns than by the income it generates for physicians,” the government economists concluded.

    Fair to Patients? That makes sense, says Kellogg’s Dafny: “We have some expectations about medical care that make it difficult to roll back the services that have always been delivered.” Most doctors are paid by the number of services they provide. Since insured patients rarely pay the cost of additional treatments or tests, there is little pressure on doctors to scale back, even when the fear of being sued is removed.

    Look at Texas, which enacted some of the most extensive malpractice reforms in the nation in 2003. The number of lawsuits in the state has fallen by half since then, and malpractice premiums are down 30%. But health-care costs in Texas are still among the highest in the nation and are growing at a faster rate than in most other states. “I think tort reform is a good idea as a carrot to get doctors to go along with more significant health-care reforms,” says law professor Charles M. Silver of the University of Texas at Austin. “But as we’ve proved, it isn’t the answer on its own.”

    Whether tort reform is fair to patients is another point of contention. The Institute of Medicine, an independent adviser to the government, estimates that as many as 100,000 Americans die yearly from medical mistakes. But only about 4% of injured patients or their families sue, according to a Harvard study. And only 1 in 5 lawsuits awards the patient. “The amazing thing is that more patients don’t sue,” says Paul H. Keckley, director of Deloitte’s Center for Health Solutions.

    • Thanks for sharing that. Interesting stuff.

    • There is no magic bullet for health care, there are numerous issues all of which need addressed. Tort reform alone may not do tons but like the article said it could help if combined with other reforms. I say use tort reform to reduce the fear of litigation so defensive medicine isn’t practiced. But then shift incentives so that the focus is on patient outcome.

      • johnhaskell says:

        I agree with you there is no magic bullet, but the problem is policymakers and lobbyists usually (always?) present ideas in an “or” manner, meaning to say, it’s tort reform “or” it’s one of these other solutions, but rarely are presented in tandem. I know that tort reform is politically popular, and there some structural reforms to the legal system I think would be beneficial to both the legal and medical professions (use of bench trials in lieu of jury trials, augment Attorney contingency fees to having a cap, put a cap on pain and suffering damages, etc.), but there are some Constitutional issues here, and from an economic stand point these move would in effect do little. But they are politically popular so they tend to be a front runner and presented as a magic bullet (if not directly, then by omission of other possible reforms).

        Drawing from Kenneth Arrow’s paper, one of the problems with reforming the healthcare industry is that it is a rather unique industry that might (is probably) not amenable to the same fixes as free market reforms. Demand, price competition, entry to barriers, etc. all differ greatly from the competitive market model, yet, many policymakers either argue directly or through their proposals that the healthcare market can in fact be reformed as though it was a used car market.

      • I fully agree. Health is a unique business because there is an inherent conflict of interest invovled. The purpose should be to improve and maintain the health of the clients, yet being a business requires that they make a profit. Well profit and health can come into conflict and those interested in profit get to make the decisions about what happens so of course they make decisions to benefit themselves. Though I think that some things can be done to address this issue.

        First if Medicare and Medicaid started focusing on outcomes rather than paying per service rendered then the incentive structure of the whole health care industry could be shifted since Medicare and Medicaid alone will make up approximately 37% of all health care expenditures this year. That means shifts in Medicare and Medicaid have the potential to pull the entire industry in a direction. Here is a piece I wrote on this.

        But as you said there are barrier to market place solutions in health care. There is no transparency of costs or quality of service to allow consumers to make informed choices about health care. Most people are highly restricted as to what providers they can see based on their insurance. That means that functionally for most people the market place is very small which reduces competition and therefore inhibits the market from operating. Furthermore most people are restricted on the health insurance they can obtain. For most of us we either take what our employer offers or go without. That makes it impossible for most consumers to pressure the health insurance market because they are not free to change plans easily. I think this issues can be overcome or mitigated with the right actions. I have a piece about that here:

        Also there are a bunch of little fixes that need to ocur. They may not even impact national health care expenditures by a tenth of a percent but they are important too and can add up. Things like fee schedules in Medicare and Medicaid wasting billions of dollars. They may not shift overall costs much at all but some of this issues are simply wasteful and should be fixed for that reason alone. Furthermore if a couple dozen little fixes save a few billion here and there it could really add up to something bigger. I have a piece on Medicare and fee schedules causing waste here:

        But there is one issue I have no idea how to and that is the false dichotomy that politicians offer the public. Either this or that, not both. When in fact we need numerous fixes in our health care industry. I can understand that we can only focus on so much at a time and it may be either this or that right now. But in the long run we will need both and more.

  3. My question about their study is whether they measured gross pay or take home. I would like to see a comparison of buying power after malpractice insurance is paid and after taxes are taken out. Malpractice insurance is ridiculously expensive in the US. In fact it would not surprise me if some of the countries paid their doctors less than malpractice insurance costs in the US.I think that should be removed from any comparison of pay.

    I believe pay in general regardless of the job should be based on the amount of work performed, the level of risk of the job and the amount invested to get the job. That is if all things were equal the person who works more should get more. Also jobs with higher levels of risk (personal, financial, legal) should be paid higher than jobs with very little risk. Finally if a job requires a greater investment of time, money and effort to obtain the job it should pay better than jobs which require less to obtain.

    In the case of doctors; they must invest a great deal into education and preparation for their field. They need to finish an undergrad degree, medical school, residency and potentially specialty training. That can easily take 10-15yrs in order to be able to practice on their own. That is a massive investment to get a job. Furthermore they incur a great deal of risk, one wrong move and they could be sued for millions of dollars and possibly loose their license. The fact that making a mistake which all people do could cost them their license is a massive risk in my view because it would cost them all of that investment to get the job. Now I can’t really speak to how hard they work as compared to other people, I haven’t worked along side any doctors enough to get an idea. But even leaving that out they should be paid well simply because of the investment to get the job and the risk associated with the job.

    Though if those factors are altered then my judgement of the pay shifts as well. In many countries the risk of being a doctor is much less since patients aren’t as sue happy as we are in the US. That alone should reduce pay; malpractice is less but also the risk of loosing one’s license is less.

    • Thats a good question. One of my friends is a doctor in Germany. She does make much less than any American doc i know, but as you pointed out, she doesn’t have to worry about malpractice or student loans.

  4. john zande says:

    I know this whole subject hypes back to the (debatable) principles of the founding fathers, but i’m still amazed the US doesn’t have universal healthcare. This for-profit idea doesn’t belong in medicine.

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