The$Costs$and$Returns$to$Medical$Education$$$$By#Nicholas#Roth*#–#UC#Berkeley#$$$$$$$Abstract:### By#treating#medical#school#tuition#payments#and#the#opportunity#costs#of#foregone#wages#as#investments#in#human#capital,#I#calculate#the#internal#rates#of#return#and#the#net#present#values#of#those#investments#across#a#range#of#medical#specialties.#I#calculate#these#values#under#two#different#sets#of#assumptions.#I#also#use#two#different#discount#rates#to#calculate#net#present#values.#Radiation#oncologists,#radiologists,#and#orthopedic#surgeons#enjoy#the#greatest#returns#on#their#investments,#while#rheumatologists,#general#pediatricians,#and#endocrinologists#experience#the#lowest#returns.#I#also#find#physician#median#earnings#to#be#very#good#predictors#of#net#present#values.#It#is#not#clear#whether#physicians#experience#increasing,#decreasing,#or#steady#returns#to#scale#for#investments#in#additional#years#of#residency#training.#An#analysis#of#physicians#who#subFspecialize#may#help#to#answer#this#question.#$$$$$$$$$$$$$$*Special#thanks#to#Professor#Ron#Lee,#Harrison#Dekker#at#the#UC#Berkeley#Data#Lab,#the#Research#and#Data#Department#at#AAMC#(in#particular#Program#Specialist#Lauren#Johnson ),#and#especially#to#my#father#Robert#J.#Roth,#M.D.#for#his#invaluable#insight#and#assistance.###2#Introduction$## Health#care#policy#in#the#United#States# continues#to#divide#and#provoke#us.#With#the#passage#of#the#Patient#Protection#and#Affordable#Care#Act#on#March#23,#2010,#President#Obama#enacted#massive#social#legislation#to#dramatically#change#the#health#care#market.#By#2019,#it#is#projected#that#the#percentage#of#U.S.#citizens#possessing#health#insurance#will#increase#by#ten#to#95%#in#total.i#It#seems#logical#to#think#that#we#may#need#more#doctors#to#accompany#this#anticipated#rise#in#health#care#demand.#Expanding#the#health#care#labor#supply,#however,#does#not#seem#to#be#an#inexpensive,#quick,#or#easy#process.#There#are#many#things#to#consider#when#we#think#about#trying#to#increase#the#supply#of#doctors.### In#making#sense#of#the#health#care#labor#market#supply,#it#is#crucial#to#understand#the#costs#and#returns#on#investments#that#we#gain#from#training#our#doctors.#Doctors#must#earn#enough#revenue#to#justify#the#expenses#of#medical#school.#They#must#also#produce#at#a#high#enough#efficiency#to#justify#the#investments#that#our#government#makes#on#behalf#of#medical#students#and#residents.#We#need#to#understand#the#components#of#medical#education#costs#and#funding#if#we#are#to#gauge#the#efficiency#of#our#health#care#labor#market.## In#this#paper,#I#seek#to#calculate#the#return#on#investment#to#medical#school#for#different#specialists.#I#use#the#models#developed#by#Fein#and#Weber#as#well#as#Richard#Scheffler#to#calculate#the#cost#of#medical#training#for#aspiring#physicians.#I#update#these#models#for#2009#data#and#I#calculate#the#rate#of#return#for#all#specialties.#I#also#calculate#the#net#present#value#of#investments#in#medical#education#to#financially#evaluate#different#medical#specialties.##3#Literature$Review$### ## A#great#deal#of#literature#already#exists#that#discusses#the#nature#of#the#physician#labor#supply.#It#will#be#useful#to#review#and#summarize#the#findings#of#these#existing#studies#before#continuing#on.## In#his#seminal#1963#article,#Kenneth#Arrow#discusses#several#aspects#of#the#health#care#market#that#make#it#unique.#He#notes#that#an#individual’s#demand#for#health#care,#unlike#food#and#clothing,#tends#to#be#“irregular#and#unpredictable.”ii#He#also#observes#that#doctors,#unlike#most#economic#agents,#cannot#be#motivated#solely#by#financial#considerations#in#administering#care.#Doctors#have#a#moral#consideration#for#their#patients#and#treatments#must#be#given#based#on#the#objective#needs#of#the#patient.#Thirdly,#Arrow#points#out#the#product#uncertainty#for#patients;#it#is#often#hard#to#know#the#consequence#of#purchasing#care#from#a#particular#doctor.#Finally,#Arrow#notes#that#entry#into#the#medical#field#is#limited#by#licensing,#but#it#is#at#the#same#time#encouraged#by#the#subsidies#to#medical#education#that#medical#students#enjoy.#These#aspects#of#the#health#care#market#distinguish#health#services#from#other#goods#and#services#markets.#We#must#treat#the#health#care#market#as#a#specialFcase#economic#entity#if#we#are#to#understand#the#economic#forces#at#work#in#the#health#sector.iii## Richard#Scheffler’s#Is#There#a#Doctor#in#the#House?#is#an#important#text#that#offers#a#historical#evolution#of#the#U.S.#health#care#market.iv#He#analyzes#many#aspects#of#the#changing#health#care#market#in#the#twentieth#century.#He#notes#that#between#1900#and#the#midF1960s,#the#U.S.#suffered#from#a#significant#shortage#of##4#doctors.#This#spawned#the#government#to#increase#medical#school#funding#in#1963,#and#“by#1976#had#resulted#in#the#building#of#some#forty#new#medical#schools#and#the#expansion#of#many#older#ones”.v#A#landmark#development#in#health#care#came#after#the#passage#of#Medicare#and#Medicaid#in#1965.#These#programs#funded#the#education#of#medical#residents#and#allowed#the#supply#of#doctors#to#increase.#By#1980,#many#worried#that#an#oversupply#had#resulted#from#government#funding.### Scheffler#notes#that#the#rise#of#managed#care#organizations#after#1983#dramatically#changed#the#health#labor#market.#Before#this#period,#doctors#had#almost#full#autonomy#over#the#prices#they#charged#and#the#services#they#provided.#Doctors#could#create#“supplierFinducedFdemand”vi#to#supply#more#services#and#bring#in#more#revenue#than#an#efficient#market#equilibrium#might#otherwise#allow.#A#managed#care#company#enrolls#members#and#creates#contracts#between#its#members#and#doctors#and/or#hospitals#to#provide#services#to#members#when#needed.#Managed#care#helped#force#doctors#to#“swallow#the#cost#of#patient#care”vii#and#it#created#a#more#dynamic#market#between#doctors#and#patients.#Managed#care#appears#to#have#reduced#aggregate#health#care#costs#without#reducing#the#level#of#care.#It#also#reduced#physicians’#average#wages#and#it#took#some#autonomy#away#from#physicians#since#they#now#had#to#gain#permission#from#managed#care#organizations#to#perform#procedures#on#patients#enrolled#in#a#managed#care#program.#Managed#care#started#its#rise#in#prominence#around#1983,#and#by#2000#it#had#claimed#30#percent#of#the#health#care#market.#That#number#has#since#declined#to#about#25#percent#in#2008.###5##
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