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Health Care Labor Markets
and
Professional Training
Dr. Katherine Sauer
Metropolitan State College of Denver
Health Economics
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Chapter Outline:
I. Supply/Demand for Health Care LaborII. Factor Productivity
III. Manpower Availability
IV. Medical Education
V. LicensureVI. Other Issues
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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 willdepend on
- its productivity
- the price of the output
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ex:
Suppose that a lab sells tests for $50 each. An additionallab technician increases output by 4 tests per day, but costs
$100 in wages for a day.
This additional technician brings in additional $200 inrevenue. (marginal revenue product)
This additional technician costs an additional $100.
Since the MRP > wage, the firm should hire this worker.
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If the firm hires another technician, they could increase
the number of tests by 3 per day. Should the firm hirethis worker?
MRP = $50 x 3 = $150
wage = $100
MRP > wage so yes, hire the worker
Continue hiring workers up to the point whereMRP = wage.
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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 returnsto labor
- the number of workers demanded is inversely
related to the wage
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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
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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
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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
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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.
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Brown (1988) looked at the utilization of physician
aides.
The Efficient Utilization of Physician Assistants:Substitution Among Inputs
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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 non-
physician costs or vice versa.
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III. Manpower Availability
A. Physicians by Type of Practice: 1975-2005
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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.
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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?
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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 toother health wages shortage exists
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D2
S2
D1
S1
L
wage
L1 L2 L3
w1
w3
w2
Suppose demand
increases. We see
that the wage risessharply.
Overtime, the
supply increasesand the wage falls
back near its
original level.
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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.
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The higher the rate of return, the greater the financialrewards 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.
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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 nursesmore
- MCL curve is higher than Supply curve
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A monopsonist hires
fewer workers than a
competitive market.
Hires the number
where MLC = MRP.
Pays according to
the supply curve.
At that wage, thereis a reported
shortage.
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IV. Medical Education Issues
Most health workers carry out tasks under the orders of a
physician.
Economists have focused on training/practice of
physicians.
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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%
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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.
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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 typicallyless than 10 percent (Sloan, Feldman, and Steinwald,
1983).
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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.
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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 tocompetition.
Fuchs refers to the claim that physicians restrict entry to
their profession in order to drive up prices for theirservices and make larger incomes for themselves.
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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
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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.
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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.
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3. Empirical Evidence
Organized medicine historically exerted considerableinfluence over the supply of trained physicians.
However, data in recent decades indicate that medical
school enrollments are responsive to market forces.
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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)
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Public Interest motive for regulation is based on marketfailure.
- 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.
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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.
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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 that5 percent of physicians are unfit to practice
8 to 22 percent of obstetrics patients and 61 to 65
percent of well-care patients received deficientcare
7.5 percent of all cases in two hospitals indicated
physician-inflicted injury
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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 ofspecialists.
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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
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B. Physician Income by Gender
Women now account for about one-half of newmedical school graduates.
Female physicians earn considerably less than male
physicians.
A survey conducted byMedical Economics indicated
that male compensation in primary care was 23 percent
higher than female compensation in 2003.
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Key Points
Basic economic tools can provide important insights into avariety 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.
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Discussion Questions:
If there were no subsidies for medical education, wouldenrollments 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?
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