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The Right Cure for Physician Wages

Shikha Dalmia
June 24, 2009, 5:48pm

In my last Forbes' column, I pointed out that Uncle Sam's method of controlling rising Medicare costs -- slashing reimbursement to providers - was the economic equivalent of leech therapy. It is simple, crude and completely ineffective. But does that mean that doctors in this country deserve their lavish salaries? In many specialties, physicians make well into six figures - often seven figures -- every year. Even discounting for malpractice liability insurance, administrative costs and other overheads, physicians in America on average make far better wages than folks in other professions. Will American medicine really go to hell in a hand basket if doctors' salaries drop to levels that other professionals - engineers, lawyers, MBAs - make?

That depends on how the wage cuts are achieved.

Physicians justify their incomes on grounds that not only do they make huge investments of time and money in order to become a doctor, but then, once they start practicing, they endure punishing schedules -- long hours, week-end calls - that no one in any other profession has to. If they can't expect commensurate compensation, they maintain, medicine will become less attractive to the best and the brightest, diminishing both the quantity and quality of doctors in this country. As evidence, they point to the burgeoning shortage of primary care physicians. GPs make less than their specialized peers and hence their field is becoming less attractive.  "We cannot cut reimbursement to physicians since levels are already too low," declared Mark Sklar, an endocrinologist in private practice - no doubt drawing at least a high six-figure income -- in a recent Wall Street Journal column.

But the fact of the matter is that neither the ardors of the profession nor the remuneration that doctors receive are writ in stone. They are both the result of manmade distortions in the health care marketplace, the chief among them being the policies of the American Medical Association.

As Milton Friedman noted, the AMA is a government-sanctioned guild that tries to protect the wages of its members by tightly restricting the supply of doctors through onerous training and licensing requirements. What;s more, he pointed out, "the AMA has engaged in extensive litigation charging chiropractors and osteopaths with the unlicensed practice of medicine, in an attempt to restrict them to as narrow an area as possible." It has also erected extremely high obstacles to foreign doctors - forcing them not just to retake their medical exams, but also redo their residencies, a huge disincentive to their coming here. Some of these requirements might be defensible, but many are simply intended to diminish competition from foreign doctors - not protect patients, as the AMA claims.

Without a doubt, if AMA were to relax these restrictions, the supply of doctors would increase and wages would fall. But the question is what is wrong about forcing down doctors' wages through government fiat as opposed to competition?

Simply slashing physician reimbursement without loosening the barriers to entry will reduce the supply of doctors. Why would new people endure the same grueling process of becoming doctors and clocking in the long hours once they get their degrees for a smaller remuneration? What's more, existing doctors, especially those nearing retirement, might well quit. In some Canadian provinces, for instance, where annual salaries are capped, doctors work till they hit the cap and then take the rest of year off to play golf in Florida - unless they can find a way to migrate to the United States. There are only two things that the government can do when confronted with such an eventuality: either increase their wages to induce them back or ration care. Canada has chosen the latter route.

AMA was among the industry groups that recently promised President Obama that they would squeeze out $2 trillion in medical costs over the next 10 years. Obama is using that as an excuse to jam $200 billion in reimbursement cuts over the next few years down providers' throat. A far wiser strategy would be to break up the AMA guild - or at least force it to relax its strictures and throw open the doors of medicine to more practitioners.


Shikha Dalmia is Senior Analyst


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