Saturday, April 14, 2007

Why Do Physicians Make So Much Money?

For that matter, why does anyone make as much as they make?

For starters, here are some things that, in isolation, do not affect what people make:

Effort and Hard Work

Painting your house with a toothbrush requires lots of effort, but any painter who proposes such a method will not make much money.


Good musicians, artists, and jugglers are highly-skilled; most need day jobs.

High Costs

You cannot simply "pass costs onto the customer"; most often, high costs will ruin your business.


Setting aside the ambiguous definition of this term, the desire for money does not make one rich (though it would be nice if it could).


Compensation for services is based on:

- Value created for others

- Opportunity costs

- The scarcity of the service

- The demand for the service

- The seller's competition

1. Value Added

How much value is added during brain surgery? How can you tell? How much value is added during a check-up? Which would you rather do without: A) A check-up for five years, or ) Water for two days? Should water cost more than a doctor's visit? A physician can save your life, but most often, you see a physician for routine advice for relatively minor problems. Regardless, whether or not you are a physician, if you don't add value, then you will make no money. (At least, you won't make it honestly.)

2. Opportunity Costs

This is just what you are forgoing when you see the doctor. If you only pay an insurance co-payment, then the opportunity cost of seeing a specialist is perhaps a meal for two at a low-end restaurant. But without insurance, you might prefer to spend some of that medical money on other things; maybe you would wait a little longer for that mysterious pain to go away, or for that chronic inflammation to settle down -- and you would certainly be more inclined to think twice about that "follow-up visit in two weeks". But since most people have insurance, they are inclined to see physicians more often than they otherwise would -- and do not pay much attention to what the doctor is charging.

3. Scarcity

Only a certified physician (and not nurses, psychologists, pharmacists, etc.) can prescribe medication and treat patients; this limits the number of practitioners who can offer medical services. And the total number of physicians is controlled by state medical boards (by limiting the number of medical schools and their enrollment), which also drives the supply of doctors down.

4. Demand

All people get sick, and they all want to get better. The demand for medicine is very inelastic.

5. Sellers Competition

Doctors rarely compete on price because the prices are set for them by insurance companies and government programs like Medicare and Medicaid. And besides, there is no incentive to compete, as the above factors (value adding, low opportunity costs, scarcity, and extra demand) give them a steady supply of customers.

Once the above five items are accounted for, their hard work, skills, and ambition might -- on the margin -- make a difference between being affluent and being very affluent.

In summary, it appears that physicians are affluent because of a combination of natural conditions (they are highly skilled and ambitious people who provide value-added services for a highly demanded product) and artificial restrictions created by the government (insurance schemes and medical school quotas). In order to determine how much of their wealth is generated by natural conditions, the artificial restrictions would need to be removed -- and that is not about to happen.


Lexcen said...

America has more lawyers per population than any other country. Do they reduce the price by competition? No,they create demand for their services by encouraging litigation.

Anonymous said...

Interestingly in France the pay is relatively lower