Health Care Labor Markets and Professional Training

Dr. Katherine Sauer Metropolitan State College of Denver Health Economics

Chapter Outline: I. Supply/Demand for Health Care Labor II. Factor Productivity III. Manpower Availability IV. Medical Education V. Licensure VI. Other Issues

I. Supply and Demand for Health Care Labor A. Labor Demand Marginal Productivity of Labor: The demand for an input and the wage paid to an input will depend on - its productivity - the price of the output

ex: Suppose that a lab sells tests for $50 each. An additional lab technician increases output by 4 tests per day, but costs $100 in wages for a day. This additional technician brings in additional $200 in revenue. (marginal revenue product) This additional technician costs an additional $100. Since the MRP > wage, the firm should hire this worker.

If the firm hires another technician, they could increase the number of tests by 3 per day. Should the firm hire this worker? MRP = $50 x 3 = $150 wage = $100 MRP > wage so yes, hire the worker Continue hiring workers up to the point where MRP = wage.

The MRP curve is the demand for labor curve. - MRP curve is found by multiplying the marginal product curve by the price of output - downward sloping reflects diminishing returns to labor - the number of workers demanded is inversely related to the wage

How does factor substitutability affect labor demand? If the firm finds it can substitute more easily between inputs, it will tend to become more resistant to input price changes, replacing increasingly expensive inputs with cheaper substitutes. Ex: Suppose a new machine allows lab technicians to perform tasks that were formerly performed by radiologists. - expect demand for technicians to increase - expect demand for radiologists to decrease and also become more elastic

B. Labor Supply Tends to slope up the higher the wage, the more hours willing to work - existing workers willing to work more - workers from another market are attracted to this market

II. Factor Productivity and Substitution Factor productivity can be measured as the average product: Average Product of Labor = Q / L Simple in theory, but there are measurement problems. - what exactly is output? - use dollar value - not all labor is the same - use weighted sum of related inputs

A. Measurement of Physician Productivity Reinhardt (1972) found that the marginal product tended to increase up until the point where the physician is working a total of about 25 hours per week; marginal product eventually declines to zero at about 110 hours per week.

Brown (1988) looked at the utilization of physician aides. The Efficient Utilization of Physician Assistants: Substitution Among Inputs

Brown concluded that physicians were underutilizing nursing inputs. In addition, Brown found that physicians in group practices were on average 22 percent more productive than those in solo practices. Escarce and Pauly (1998) found that each hour of time for an office-based internist substitutes for $60 in nonphysician costs or vice versa.

III. Manpower Availability A. Physicians by Type of Practice: 1975-2005

B. Availability of Physicians Of the 762,000 active medical doctors in the United States in 2005, 718,000 provided direct patient care. Physicians form a large number of specialties rather than a homogeneous group. Planners and policy makers often worry about having adequate quantities of health manpower and avoiding serious shortages, especially of physicians.

C. Shortages Economic and Medical definitions of a shortage may differ. Medically: not enough health care professionals to provide adequate care to serve the population. Economically: if wage is below equilibrium, there will be a shortage. The wage will rise to clear the shortage. If a shortage persists, it must be because the wage isnt rising. - sticky wages? sticky prices?

Dynamic shortages: even if the market is in short-run equilibrium, there may be a shortage of professionals as conditions change over time - if the relative wage rises sharply relative to other health wages shortage exists

wage S1 S2 w2

Suppose demand increases. We see that the wage rises sharply. Overtime, the supply increases and the wage falls back near its original level.

w3 w1 D2

D1 L1 L2 L3 L

Hansen (1964) proposes that the relevant measure of monetary gains to a given health professional group must take into account the various opportunity costs incurred by professionals in obtaining their training. The internal rate of return is a measure that attempts to accomplish this conceptual task. - discount rate that equates the present value of the stream of costs to the stream of revenues from education.

The higher the rate of return, the greater the financial rewards are to investment in the human capital attained through education. To determine whether a given health professional group is in relatively short supply, we can compare the rate of return to that of other professionals and examine these comparative data over time.

D. Shortages and Nurses Practitioners who describe health manpower availability often rely on reported percentages of unfilled, budgeted positions. A monopsony is a market that in theory has only one buyer; for example, a monopsony would be one hospital that hires virtually all registered nurses in the market.

Monopsonistic Labor Markets - one buyer - supply curve no longer represents the marginal cost of labor - if need more nurses, raise wages to attract them now have to pay all nurses more - MCL curve is higher than Supply curve

A monopsonist hires fewer workers than a competitive market. Hires the number where MLC = MRP. Pays according to the supply curve. At that wage, there is a reported shortage.

IV. Medical Education Issues Most health workers carry out tasks under the orders of a physician. Economists have focused on training/practice of physicians.

A. Government Subsidization Medical school education is highly subsidized by the government. Medical school funding - tuition 4% - government support 30% - services provided to patients 50%

Why are students allowed to pay such a small portion of the cost of their education when they receive such a large return on their investment? - capital market imperfections - hard to secure a loan for improvement in human capital Leffler and Lindsay (1981) conclude that with such capital market imperfections, reliance on private markets leads to an underinvestment in medical education. Thus, government support can be justified on economic grounds.

B. Joint Production Medical schools are a good example of joint production. - medical education - patient care - research

An examination of the cost differences between teaching and nonteaching hospitals shows that nonphysician costs per day are 21 percent higher in teaching hospitals. However, sorting out the causes for cost differences and making appropriate statistical adjustments refine these data. After this is done, nonphysician costs, though still higher in teaching hospitals, show a difference that is typically less than 10 percent (Sloan, Feldman, and Steinwald, 1983).

C. Foreign Medical School Graduates (FMGs) US physician supply depends significantly on FMGs - immigration policy A frequent concern about FMGs is quality of care but studies of the quality of care provided by FMGs, however, find little difference between the two groups.

D. Control of Medical Education In 1974, Victor Fuchs wrote that most economists believe that part [of physicians high incomes] represents a monopoly return to physicians resulting from restrictions on entry to the profession and other barriers to competition. Fuchs refers to the claim that physicians restrict entry to their profession in order to drive up prices for their services and make larger incomes for themselves.

1. The AMA The argument is that control over entry in the profession is exercised by the American Medical Association (AMA). The American Medical Association (AMA) was founded in 1847. - campaigned state by state to get the medical profession controlled through licensure - inspected medical schools - called for reduction in number - called for quality control

The AMA has the power to determine the supply of physicians. The AMA has also been able to exercise control over substitute providers e.g., optometrists, podiatrists, chiropractors by influencing licensure to limit their scope of practice and later to limit third-party reimbursement for their services.

2. Another View: The Donor Preference Hypothesis Hall and Lindsay (1980) argue that medical schools do not take larger proportions of applicants and medical school enrollments respond only partially to applicant demand because the administrators of medical schools are responding rationally to their economic incentives.

3. Empirical Evidence Organized medicine historically exerted considerable influence over the supply of trained physicians. However, data in recent decades indicate that medical school enrollments are responsive to market forces.

V. Licensure First licensure requirements were passed in NYC in 1760. Many states introduced licensing, then abolished. AMA reintroduced state licensing. Licensure is part of a broader issue of regulation: - public interest theory (quality of care) - self-interest theory (limit competition)

Public Interest motive for regulation is based on market failure. - information asymmetry - patients have limited information about the quality of service - relatively costly to get information Self-Interest motive for regulation is based on the notion that reducing competition results in higher returns.

Evidence: Paul (1984) tested the public interest versus self-interest theories and found a strong negative association between the year of initial licensure and the number of AMA-associated physicians in a state per capita. Graddy (1991) also tested the competing hypotheses and found that no single dominant motive can be found for regulation.

Gaumer (1984) review of the empirical evidence questions whether the goals of protecting the public and ensuring minimal standards of competency are being achieved. With respect to the quality of physician care, he cites studies indicating that 5 percent of physicians are unfit to practice 8 to 22 percent of obstetrics patients and 61 to 65 percent of well-care patients received deficient care 7.5 percent of all cases in two hospitals indicated physician-inflicted injury

VI. Other Issues A. Specialization Studies of physician specialty selection are especially important because of widespread beliefs that quality health care requires access to an appropriate mix of specialists.

Bhattacharya (2005) describes four possible explanations for the wide income disparities across specializations: - differences in hours worked - differences in length of residency and other required training - difference in the attributes and skills needed to perform in a specialty - barriers to entry into some specialties

B. Physician Income by Gender Women now account for about one-half of new medical school graduates. Female physicians earn considerably less than male physicians. A survey conducted by Medical Economics indicated that male compensation in primary care was 23 percent higher than female compensation in 2003.

Key Points Basic economic tools can provide important insights into a variety of health care labor issues, including the demand and supply of labor, optimal input decisions and factor substitution and labor shortages. Various characteristics of physician training and licensure may be designed to increase barriers to entry into the profession, so as to produce higher-than-normal rates of return.

Discussion Questions: If there were no subsidies for medical education, would enrollments be larger or smaller? Would the return to medical education be larger or smaller? What are the social benefits and costs behind regulating the number of medical schools?