Health Care Labor Markets and Professional Training

1. Health Care Labor Markets and Professional Training 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

2. Factor Productivity and Substitution among Factors • Measure of Physician ProductivityReinhardt (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.

3. 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.

4. 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.

5. 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 nurseImagine 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.

6. 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.

7. 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.

8. Foreign Medical School Graduates (FMGs) • Physician supply in the United States depends to a significant degree on foreign medical school graduates (FMGs). Nearly one-fourth 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)

9. 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.

10. 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.

11. Licensure and Monopoly Rents • 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.

12. 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 “state-enforce 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.

13. Evidence of Public Interests versus Self-Interest • Paul (1984) show a strong negative association between the year of initial licensures and the number of AMA-associated 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.

14. 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.