Let’s Pay Doctor

Couldn’t we fix the health care system by paying doctors less?

President Obama has promised to pay for health care reform mostly by ridding the system of wasteful spending. The message is that reform will be painless: We’re cutting the fat, not the meat. But what if your paycheck is part of the fat? More to the point: Does cutting back on wasteful health care spending mean that doctors will make less money?

Actually, let’s split that question in two. The first is whether U.S. doctors are overpaid. The second is whether paying them less would save all that much. The answers, respectively: yes and no.

There’s no question that doctors in the United States make a lot of money, especially compared with their counterparts abroad. American doctors make, on average, four times what French doctors earn. And it’s not just because everyone in America makes more money: The gap between doctors’ incomes and those of professionals is far bigger in the United States than elsewhere. In the 1990s, the ratio of the average American doctor’s income to the average American employee’s income was about 5.5. In Germany, it was 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; the United Kingdom, 1.4.

American doctors’ salaries are high for several reasons. The first is the cost of education. In France and Great Britain, students go directly to medical school after high school, and their entire educations are free. In the United States, students must first get a bachelor’s degree before attending medical school, and the average medical student’s debt is $155,000. Then come at least three years of residency, which usually pays less than $50,000 a year. After all that, it’s no wonder doctors feel entitled to six-figure salaries. Another reason U.S. doctors get paid a lot is market forces: In a single-payer system like Britain’s, the government can bargain down the prices of treatments, which leads to lower income for doctors. No such entity exists in the United States—Medicare is big, but not that big.

Finally, there is the notion of opportunity costs. Presumably, many doctors could have opted for jobs on Wall Street or in management consulting instead of choosing to go to medical school. “They sit in the Princeton eating clubs,” says health care economist Uwe Reinhardt, “and one guy just got a starting job at Goldman for $150,000. Another guy says, ‘I’m going to medical school to take on $35,000 a year in debt.’ That leads to a kind of hunger for money to catch up.”

But none of this really matters, because doctors’ salaries aren’t a large enough chunk of health care spending in the United States to make a difference. According to Reinhardt, doctors’ net take-home pay (that is, income minus expenses) amounts to only about 10 percent of overall health care spending. * So if you cut that by 10 percent in the name of cost savings, you’d only save about $26 billion. That’s a drop in the ocean compared with overhead for insurance companies, billing expenses for doctors’ offices, and advertising for drug companies. The real savings in health care will come from these expenses.

That said, it appears that health care reform will have some leveling effect on doctors’ salaries. Primary-care doctors, for example, make significantly less than specialists. While the median salary of a family doctor is $137,000, the median anesthesiologist makes $260,000. The House bill would boost Medicare payments to primary-care physicians by about 10 percent. The theory is that rejiggering payment incentives will attract more primary-care doctors—which would promote prevention and front-end treatment—and reduce the flow of patients to specialists.

The inevitable result: Primary-care doctors get paid a little more, specialists a little less. But even that could be a tough sell. “Whenever you’re talking about cutting specialists’ pay, you’re going to have a lot of resentment,” says Kevin Pho, a primary-care physician in New Hampshire who writes the blog KevinMD. That’s why the bills don’t explicitly cut specialists’ payments. “It’s not necessarily that I’m paying this doctor $2 more and this one $2 less,” says Ellen-Marie Whelan, a health policy analyst at the Center for American Progress. “It will come from savings within the system.”

Beyond that, however, it’s hard for the government to set physician income. It can’t dictate the costs of treatments as in France or the United Kingdom. It can only negotiate lower prices through Medicare and hope that the rest of the industry follows suit. (It often does.)

That might be a good thing. After all, it is possible to pay doctors too little. In the same way many Americans complain about low teacher salaries, chatter about low doctors’ salaries is common in France, Japan, and the United Kingdom. Some would say it’s best to err on the side of overpaying doctors than underpaying them. Moreover, Americans don’t seem to mind paying doctors a lot—especially if insurance companies are the ones paying.

That’s why economists tend to focus not on how much doctors get paid but, rather, on how they’re paid. For example, many doctors are paid fee-for-service—every time they prescribe a treatment or a test, they get a cut—which incentivizes overspending. If doctors were paid a flat rate for every patient they saw plus a bonus for positive outcomes, that would incentivize better health rather than more spending.

None of these solutions is perfect. As Harvard’s David Himmelstein and Steffie Woolhandler have argued, “Even paying doctors based on quality measures (using data from medical records that the doctors themselves create) can be fudged.” Plus, whichever payment method is used, it doesn’t change the fact that someone, somewhere, will be paid less. And they’re not going to be happy about it.

Correction, Sept. 11, 2009: This article originally stated that doctors’ take-home pay amounts to 1 percent of overall health care spending. In fact, it’s about 10 percent. (Return to the corrected sentence.)