Health Care Labor Markets and
Professional Training
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4.
Factor Productivity and Substitution among
factors
Economic Definition of Shortages of Health
Professionals
Medical Education issues and the question of
control
Licensure and monopoly power
Factor Productivity and Substitution among Factors
• Measure of Physician Productivity
Reinhardt (1972) undertook a classic study of physician
productivity. He examined general practitioners in private
practice for three measures of the output: total patients
visits, office visits, and patient billing. Reinhardt
estimated the marginal product of physician time-the
increment to computer resulting when one extra a hour
of physician time is added to the production process.
(1) The physician’s marginal product tends to increases
until a total of about 25 hours per week; the marginal
product eventually declines to zero at about 110 hours
per week.
(2) Consider physician aides, Reinhardt found that the
aides’ marginal products were higher when
approximately one aide was present per physician.
Furthermore, physicians could improve productivity of
their practices and increases profits if they doubled the
number of aides from two aides per physician to four
aides per physician.
The Efficient Utilization of Physician Assistants-Substitution
• Brown(1998) estimated the marginal product of
physician time and other inputs. By dividing MP by the
wage rate of each input to get marginal product per
dollar spent on each factor, we can draw inferences
about whether physicians are underutilizing or
overutilizing various categories of workers (physician,
secretary, registered nurse, practice nurse, technician
and physician assistant).
(1)Brown concluded that physicians were underutilizing
nursing inputs. These practice nurses have a higher
marginal product per dollar, 0.129, than do physicians,
0.114; thus, the offices would become more profitable if
one substitute practical nurses for physicians.
(2) Group practices were on average 22 percent more
productive than those in solo practice. The reason is that
group practices have in employing physician assistants.
Other works provides evidence on the extent of the
substitution between physician time and other labor input
• Escarce and Pauly (1998) found that each hour
of time for an office-based internist substitution
for $60 in nonphysician costs or vice versa.
• Jacobson and colleagues (1998/1999) reports
that PAs/NPs (physician assstant/nurse
practitioner) can perform 50 to 90 percent of the
tasks of primary care physicians without
compromising quality when they work
collaboratively with physicians. They also found
that PAs/NPs has greater scope of practice and
autonomy as the proportion of managed care
patients in a health care organization increases.
Economic Definition of Shortages of Health
Professionals
• The common explanation for excess demand in labor market is
wage stickiness (see Figure 15-4). However, what could cause
wage stickiness in health care markets? It seems doubtful that
health manpower wages are sticky in the sense of administrative
rents or prices are a serious policy problem.
• The role of monopoly power-shortages of registered nurse
Imagine that one hospital is the only demander of nurse labor in the
market. The hospital’s demand curve for nurse labor represents the
marginal revenue product curve for nurses (see Figure 15-6). Under
monopoly, the supply curve for labor will not longer represent the
marginal labor cost, MLC. When the monopolist hospital seeks to
add one nurse to work. Then, it must pay all of its employed nurse a
higher wage. As a result, the MLC will live above the labor supply
curve. The monopolists will fire fewer and at lower wage. At this
equilibrium wage, W*, the hospital would desire to hire N’ nurse. It
may well budget for these nurses and effectively report a shortage of
(N’-N*). The existence of monopsony power in labor market
suggests that unfilled positions data may overstate the problem of
nursing availability.
Source of Medical School Revenue
• Medical school education is subsidized by government
(30%). Tuition represents a relatively small source (about
4 %) of medical school revenue. The largest share
(about 50%) comes from reimbursements for health
services provided to patients.
• Q: Why do students pay for a relatively small share of
their training since physicians earn higher income in the
future?
• A: The imperfections in capital market lend up to full
value of the investment in human capital. It is difficult to
guarantee this repayment in an individual case. Leffer
and Lindsay (1981) conclude this imperfection leads to
an underinvestment in medical education. They
estimated that an optimal level of support would be 36
percent of the costs of medical education.
Teaching Hospitals, Medical Hospitals, and Joint Product
• Medical produce at least three products jointly (joint product):
medical education, patient care and research.
• Newhouse (1978) illustrates these products to determine the
pure costs and the joint cost. (Table 15-3)
Notice that the difference of this hypothetical medical school
and all the pure costs is $20 million (joint costs). Much of the
controversy with respect to funding revolves around the
problem of will pay for the joint costs.
• The issue of joint production has centered on the teaching
hospital, which also jointly produces patients care and
medical education through its provision of internship,
residency, and medical research. In particular, with substantial
cost differences between teaching and non-teaching hospitals,
third-party payers are concerned about whether they are
unnecessarily subsidizing medical education.
• Sloan, Feldman, and Steinwald (1983) point out that an
examination of the cost differences between teaching and
nonteaching hospitals shows that nonphysician costs per day
are 21 percent higher in teaching hospitals.
Foreign Medical School Graduates (FMGs)
• Physician supply in the United States depends to a significant
degree on foreign medical school graduates (FMGs). Nearly onefourth of all physicians are graduates of foreign medical schools.
• Rapid increases in physician wages send a market signal to
potential physicians, increasing the estimated rate of return to an
investment in medical education. However, the supply of new
American physicians will respond slowly to the wage signal since it
takes a long time to get to medical school, be trained and enter
practice. Foreign national FMGs, already trained but correctly
practicing elsewhere, can respond more quickly. Therefore, the
availability of foreign national FMGs makes total physical supply in
the U.S. more elastic.
• These facts about FMGs can be used by policymakers during
shortage and increasing fees. Immigration policy can be relaxed to
admit more FMGs like that in 1960s (shortage) but tightened policies
by a1976 (surplus)
• Studies of the quality of care provided by FMGs, however, find little
differences between FMGs and US counterparts. (Rhee et al., 1986)
The Control of Medical Education
• Fuchs (1974) claimed that physicians restrict entry to
their profession in order to drive up prices for their
services and thus themselves make larger income.
• To discuss his issue, this question should be asked in
two steps, taking first the issue of whether physicians
earn above-normal returns. Some evidence support this
point and suggested that control of entry was the cause.
Second question: how is that physicians could control
entry? Kussel (1958) argued that monopoly power was
attained by organized medicine in several ways, two of
the most important being licensure of physicians (talk
later) and control of access to medical education. For
example, over time, large fractions of medical school
applicants have been rejected. American Medical
Association (AMA) charge over determining the supply of
physicians and also gain control over the
intership/residency process through it ability to certify
hospitals from training.
Another View-The Donor Preference Hypothesis
• Hall and Lindsay (1980) argue that medical schools do not
take large proportions of applicants and medical school
enrollment respond only partially to applicants to applicant
demand because the administrators of medical schools are
responding rationally to their economic incentives.
• Medical school revenues come not so much from tuition paid
by the students but from donors. For the most part, it is these
donors who are the true demanders of the output of medical
schools-trained physicians. The donor, however, often are
interested only is some of many potential graduates-those
with specific attributes in terms of personal characteristics
and performance and professional goals.
• In other words, to ensure that donations and financial
support continue, medical schools establish a selection
process to recruit the “appropriate qualified” students. Thus,
the data on excess demand school applicant should not be
viewed as true excess demand when we see that the true
demander is the medical school donor.
Licensure and Monopoly Rents
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Many economists believe that licensure and professional control over
medical education ensures that earn economic rents. Friedman and
Kuznets (1945) examine the relative return of phyisicians and dentists. After
adjusting for training differentials, they estimate that about half of the 33
percent excess earnings of physicians between 1928 and 1934 represented
economic rents.
Leffler (1978) argued that many earlier studies failed to take into account
some important economic considerations that tend to reduce estimates of
the return. These adjustments include the high number of hours worked by
physicians, their expected mortality rate, and progressive income tax
structure.
Burstein and Cromwell (1985) compared the internal rates of return on
physicians to dentists and lawyers. After considering many adjustments,
including length of physician training, length of working, and the earnings of
medical residents, they found that the rates of return were high compared to
lawyers. (12.1% v.s. 7.8%). They concluded that “the conventional picture of
medicine as a financially attractive profession is strongly confirmed.”
Seldon and colleagues (1998) examined physician’ price-cost margins,
defined as (p-MC)/p. Under highly competitive condition, the price-cost
margin is zero. If physicians have monopoly power, the margin will be
positive. The researchers estimated the margin at 23%. These estimates
indicates “nontrivial” levels of monopoly power that produced a welfare loss
to the US economy of about $8 billion in 1996 dollar.
Public Interest or Self-interest
• The public interest motivate is based on theories of
market failure such as information failure. The demand
for regulatory measures such as licensure is due to the
limited information patients have about quality and the
relative high costs of obtaining information. For example,
Akerlof’s lemons model. Leffer (1978) argued that
asymmetric information will lower quality. Thus, a “stateenforce minimum quality standard is claimed to be an
efficient response to costly quality information.
• In contrast, the self-interest motives for licensing reduce
competition. (Stigler,1971;Pelzman, 1976) Regulation is
the result of specific interests that provide financial and
political support in return for favored legislation.
Evidence of Public Interests versus Self-Interest
• Paul (1984) show a strong negative association between
the year of initial licensures and the number of AMAassociated physicians in a state per capita. His finding
rejected the public interest theory.
• Graddy (1991) tested the competing hypothesis by
estimating the probability (and type) of regulation by
states of six health care professions. Her finings indicate
a higher probability of a strict form of regulation as the
profession’s educational requirements are higher-a
finding consistent with a public interest motive. However,
no single dominant motive can be found for regulation.
Legislators respond to organized interest, the public
interest and their own legislative environments.
Licensure and Quality
• Gaumer’s (1984) review of empirical evidence questions whether
the goals of protecting the public and ensuring minimal standards of
competency. He found that (1) in spite of licensure, a substantial
amount of deficient care is being rendered; (2) quality of care would
not be impaired if the scope of practice of secondary
(nonphysician/dentist) providers were increased;(3) the licensing
process may “not accurately assess the practice competence of
applicants and (4) fee and provider incomes are higher in states with
more restrictive licensures requirements.
• Brennan and colleagues (1991) provide additional evidence on the
quality of medical care in hospitals. Licensure is just one of many
regulatory requirements intended to ensure that standard are being
met. As a result of the questionable effect of licensure on quality,
changes in the health care environment, and the anticompetitive
effects of restrictions on entry and restrictions on the scope of
practice of potential competitors, the benefits of licensures are being
reexamined.
• Svorny (1992) suggests that the benefits have been weakened by
the added liability that courts have placed on hospitals and HMOs
for the negligent conduct of independent and by the increased use
of salaried physicians.