To practice medicine, physicians train for many years. But once this training is complete, they enter a market with supply limited by this training length, and demand supported by the government through public health insurance subsidies. Physicians are the most common occupation among the top one percent of income earners and, despite the government’s larger role in the market, we do not have a good understanding of how much physicians earn or how government payments shape their labor market choices. This paper addresses these questions. The authors ask whether these high earnings are purely rents, or change important economic decisions, such as which specialty a physician chooses.
The authors create a new dataset by linking administrative information on physicians to tax records. They measure physicians’ earnings and estimate the influence of healthcare policies on physicians’ incomes, labor supply, and allocation of talent. In the first part of their paper, they document a set of descriptive facts about physician earnings:
The authors next assess the impacts of government policies on physicians’ earnings. Using income tax, Medicare billing, and specialty choice data, they consider two types of insurance policy changes: changes in coverage and changes in payment rates. They find the following:
The upshot is that government payment rules play a key role in valuing and allocating one of society’s most expensive assets: physicians’ human capital. Taken together, the results here suggest that policies subsidizing surgery will increase surgeons’ incomes and allocate more top talent to surgical specialties, improving surgery for a generation. Subsidizing primary care will instead increase these physicians’ incomes and allocate top talent to primary care, improving primary care for a generation. To conduct sensible policy evaluation in this environment, further work should quantify the health impacts of ability in different specialties and determine the overall welfare impact of talent allocation.