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The Great Unmentionable

The role of high salaries and wages in health care inflation.

Jul 30, 2012, Vol. 17, No. 43 • By ELI LEHRER
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In discussions of America’s high health care costs, surprisingly little attention is paid to salaries and wages. Yet the fact that medical jobs simply pay more than those in other sectors is beyond dispute. A physician practicing in a primary care setting, according to the Bureau of Labor Statistics, earned an average of just over $200,000 in 2010, while specialists averaged over $355,000 (the highest of any professional category tracked). By comparison, lawyers average just over $110,000, airline pilots about $92,000, and chartered actuaries (who calculate risk for insurance companies and must pass complex exams longer and arguably more difficult than the medical boards) about $150,000.

Doctors Price Gouging?

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The wage disparities, however, don’t stop with physicians, who do, after all, need to complete an academic curriculum that’s beyond most people’s abilities. Registered nurses and dental hygienists, who need only associate’s degrees, earn about $70,000 a year. This is about as much as degreed computer programmers. And it’s significantly more than high school teachers and forensic scientists, who need master’s degrees but earn a little less than $60,000 on average. And wage disparities exist at all levels of the health care industry: Even nonmedical professionals like janitors tend to earn more in health care settings than those working elsewhere. An extensive report from the Brookings Institution sums up the evidence: “Health care pays higher than average wages regardless of workers’ skills and demographic characteristics.” Indeed, the report goes on, “expanding health care is likely to raise wages throughout a metropolitan area by putting upward pressure on wages throughout the metropolitan labor market,” even for jobs requiring no post-high school training at all.

There’s no way around it: Wages drive high medical costs much more than any other factor. Between 2005 and 2011, as overall average wages barely kept pace with inflation (with rising health costs making real take-home pay flat for many workers), average medical wages grew a healthy 18 percent, rising from just over $62,000 to almost $73,000. The American Hospital Association estimates that two-thirds of all medical costs are attributable to wages and benefits. 

Not only are the wages high but medical jobs have the kind of security few other professions can match. Total employment in the medical/education “super-sector” has never declined in the more than 40 years that the Bureau of Labor Statistics has tracked it, using current methodologies. Between 2008 and 2010, as the country sustained the deepest job losses since the Great Depression, the number of health care practitioners and support personnel increased by almost 400,000, even as the economy overall shed more than 7 million jobs. Doctors’ unemployment rate has never exceeded 2 percent.

Unfortunately, all this expense is not producing significantly better health care outcomes. While the United States undoubtedly leads the world in medical innovations and cutting edge care for uncommon conditions, gross measures of health care outcomes like life expectancy and infant mortality (which, it’s true, are heavily influenced by lifestyle, demographic, cultural, and genetic factors independent of the medical system) are below average for wealthy countries. By some measures, American health care practitioners work less hard than their peers in other countries. While other wealthy countries average just a little over three hospital staff per hospital bed, American hospitals have more than five people for each bed. The U.S. health care system may not be worse than those elsewhere—it does draw people from all over the world—but there’s no evidence the enormous labor costs are producing world-beating outcomes.

While American hospitals do generally have higher capital expenses than those elsewhere in the world in terms of high-tech diagnostics and creature comforts like private rooms for patients, many costs paid by all hospitals everywhere—rents, taxes, energy, food service—are more affordable in the United States than in other rich nations.

And nothing about the training costs of the people who provide medical care explains their high wages, either. Because medical school takes four years of full-time study—as compared with three years for law school and two for business school (tuition is comparable)—doctors do, indeed, graduate with more debt than people pursuing other professional training. But the wages they earn afterward more than make up for this: An average year in medical school costs about $25,000 at most public schools, while doctors make, on average, $80,000 more than lawyers but spend only one year more in school. And while many students capable of doing the work can’t find an accredited medical school willing to admit them, that’s not true for all medical professions. Anyone with a high school degree can train to become a nurse, lab tech, or other health care worker. 

Malpractice insurance can also be very expensive, but this isn’t so everywhere—internists in states that cap malpractice awards can get it for only a few thousand dollars a year—and, in any case, the overwhelming majority of health care professionals don’t need malpractice insurance. Even in states like Florida where insurance costs over $50,000, doctors still take home very comfortable six-figure incomes in almost all cases.

If this happy confluence of factors for medical professionals—high wages, excellent job security, below-world-average workloads, and extremely high returns on educational efforts—resulted from a free market, it could rightly be considered a triumph of capitalism. But it does not. Government provides a little less than half of the total medical spending in the United States (about 46 percent by most estimates; more if tax expenditures are included), oversees the licensing of almost everyone who comes near patients, and limits where and when hospitals get built. The system that produces these high wages is shot through with government subsidies and regulations. Absent a reform that simply ends government involvement in health care altogether, it’s hard to envisage lower health care costs without lower compensation for workers in the sector.

But nobody wants to touch the issue. Even if they may occasionally gripe about the high wages paid to doctors, liberals like the authors of the Brookings study actually celebrate these higher-than-market wages and, just as important, how major medical centers serve as key employment generators in Democratic-leaning major cities. (All of the 10 largest cities and 19 of the top 20 count a hospital system as one of their top 5 employers.) But conservatives do no better: The only real cost containment measure included in President Barack Obama’s disastrously bad health care bill—an “Independent Payment Advisory Board” (IPAB) with the power to slow the growth in payments for Medicare services—has been derided as a “death panel” and as a “socialist dream” by conservative critics, yet the board won’t have any direct say about the more than 70 percent of care not paid for by Medicare, it is specifically prohibited from rationing care, and it almost certainly won’t cut nominal dollar payments for anything. The point isn’t that IPAB is a good idea—it’s poorly designed and lets bureaucrats make decisions Congress should make itself. But it’s striking that conservatives who are more than willing to talk about how public school teachers, government regulatory bureaucrats, and government workers in general are overpaid have jumped to the defense of much more costly and consequential high salaries in the medical sector.

Of course, nobody of any party wants to talk about cutting pay for any broad group of workers, particularly in the fastest growing sector of the economy. It seems heartless, at best. But there may be no other choice at a time when Medicare and Medicaid alone consume about a quarter of the federal budget (defense is 20 percent), and health care seems poised to overtake education as the largest budget area in almost every state. There’s simply no other major source of “fat” that could be cut: Medicines, for example, are less than 10 percent of all health care dollars, and cutting that in half immediately, a step that would have catastrophic results, would have roughly the same effect as simply freezing medical wages for two years. Confiscating all insurance company revenues beyond their medical expenses and operating costs (which run between 93 and 95 percent) likewise would produce roughly the same cost containment as a one-year medical wage freeze.

Yet unless medical wages get under control, entitlement spending will continue to eat up an ever-larger share of the federal budget and necessitate either service cuts elsewhere or tax increases. Better access to medical care for the poor—a key priority of the left—will also remain out of reach if almost everyone involved in providing it must earn an upper-middle-class income. 

Still, there’s little reason to think any practicable public policy course could bring medical wages under control quickly. And the list grows even shorter if one discards heavy-handed, big-government approaches such as creating a single-payer system that sets all medical wages by central fiat. Still, two possibilities that rely on market mechanisms and deregulation deserve consideration from small-government advocates who want to get serious about health care costs. 

First and most important, private insurers should have a stronger hand with which to negotiate prices. While insurers already have a very limited antitrust exemption to share consumer data, they are currently in a very weak bargaining position with regard to medical professionals. Almost all consumers want to be able to select their own doctors. Both employers and individuals pick insurance plans largely on that basis. (Managed care systems contained medical costs for a few years in the 1990s by strictly limiting the doctors people could see, but proved enormously unpopular when they did this and have largely given it up.) Even the biggest individual insurance plans rarely cover even half of the population of a given area, and no single plan extends its core network beyond a pretty narrow metropolitan region. This has let doctors and hospitals play insurers against one another and stopped them from negotiating prices effectively. 

This should change. In countries like Japan, Germany, and the Netherlands, which also administer many health benefits through private parties, insurers have much broader latitude to cooperate in setting prices. Since doctors typically have the ability to opt out of accepting insurance altogether if these prices are too low to cover costs and retain talent, such a system isn’t necessarily unfair to them. But it does level the playing field. 

Likewise, the supply of people needed to do medical tasks needs to be increased. The way to do this isn’t to lower standards, but rather to let medical professionals other than physicians do more useful work. Current law, correctly, lets all doctors who pass internal medicine boards treat all sorts of conditions. Internists, for example, can prescribe antidepressants and, if they want to, even develop special expertise in treating psychiatric symptoms. While it is permissive with regard to doctors, however, the range of tasks allowed to other medical professionals is very limited. 

Hardly anyone doubts the overwhelming majority of veteran registered nurses could—with a little more training—do a fine job setting broken bones, stitching wounds, and even dispensing drugs for common ailments. But laws and regulations limit almost all of these things to physicians and nurse practitioners, who must complete a graduate-level course of study similar to medical school. Among less-skilled medical workers, the current certification requirements border on the absurd. Licensed practical nurses are essentially menial hospital workers who collect vital signs, change bedpans, and bathe patients. To do this, however, they need more than a year of full-time schooling and, even so, generally can’t even give hospital patients aspirin a doctor has not already prescribed. Some work of LPNs might be done by people trained mostly on the job and those with LPN training should be able to do more than they do now. And so forth. 

These solutions aren’t a total fix. Medical wages are high in part because medical care is so important. It’s vital that medical professionals get fair pay. But their pay cannot and should not rise at a rate so much faster than everyone else’s. Achieving the health care goals of both the left and the right is eventually going to require doing something about the wages paid to medical professionals.

Eli Lehrer is president of R Street.


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