According to recently released data from the Bureau of Labor Statistics, medical and dental professions now account for 14 of the 15 highest paid occupations in the United States (measured in terms of annual income). Put another way, of nearly 800 occupations surveyed, doctors and dentists were at the top of the list. In contrast, chief executive officers ranked ninth. Does this mean U.S. doctors are overpaid?
The annual rate of return to an investment in physician education currently is at double-digit levels. Approximately 50 years ago, earlier studies found that such rates of return were much less than 10 percent. The numbers represent the hours-adjusted annualized rate of return on medical education over a doctor’s working lifetime. That investment in medical education includes direct costs (tuition, books, and so forth) and indirect costs, that is, the income foregone by attending college, medical school, and doing a residency rather than working. The return on this investment is the higher annual compensation physicians receive relative to what similar individuals receive on average during each year of their career. The hour adjustment is important because physicians work longer hours than the average worker does. The rate of return is annualized to make it the same as other investments. For example, from 1900 to 2010, the total rate of return for the Dow Jones Industrial Average was 9.4 percent.
These data are approximations because such information for every category of physician is not available. Each of the past studies that have examined this question differ in their methodological details. However, they suggest that while it may not have been true in the “Dr. Welby” era of the 1950s and 1960s, by the 1980s a typical physician earned a healthy rate of return compared to investing comparable resources in the stock market.
But it may surprise some readers to learn that the sizable rates of return for doctors appear to be less than for other professional degrees such as in business or law. Dentists and physician specialists have comparable rates of return, but primary care doctors have lower—albeit still impressive—rates of return. This is consistent with the general impression that primary care doctors are “underpaid” relative to specialists. Not surprisingly, there is a shortage of primary care doctors.
In the chart shown, procedure-based medicine is defined as surgery, obstetrics, radiology, anesthesiology, and medical subspecialties. Long-term trends for the other professions shown in this chart are not available, but we do know that median CEO compensation has increased considerably, rising from less than 60 times average U.S. worker compensation in 1940 to more than 100 times that average by 2004.
It is well-known that much of the difference in healthcare spending between the United States and other nations can be attributed to the higher prices Americans pay for medical care. But the foregoing comparisons suggest that high prices for health labor in the United States might simply reflect higher returns to skilled labor across the board. After all, if we were “overpaying” doctors, we would expect to see a doctor surplus. Yet this is not what we observe. Paying doctors less would not benefit the country as a whole. That is, every dollar saved by consumers also would be one less dollar of income for doctors. Moreover, if doctors were paid much less, more people might get MBAs or law degrees instead. This would surely reduce health spending, but reasonable people might disagree on whether it would improve social welfare.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research. The chart shown is from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version and Excel spreadsheets on highest-income occupations and annual rate of return on education for data, sources, and methods.