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The Allocation of Talent
Talent flows to where it is highly rewarded so if price and wage control limit rewards in one sector of the economy, talent will flow to the uncontrolled sector. Mark Ramseyer looks at one implication:
The Japanese national health insurance provides universal coverage. Necessarily, this entails a subsidy that dramatically raises the demand for medical services. In the face of the increased demand, the government suppresses costs by suppressing prices. By combining extensive biographical (including income) data on all 449 Tokyo cosmetic surgeons and a random sample of 499 other Tokyo physicians, I explore the effect of this price suppression on the allocation of talent and the development of expertise. Crucially, the national health insurance does not cover services - like elective cosmetic surgery - deemed medically superfluous. Facing price caps in the covered sector but competitive prices in these superfluous sectors, the most talented doctors should tend to shift into the superfluous sectors and there to invest heavily in their expertise. I find evidence consistent with this: cosmetic surgeons earn higher incomes than other doctors; are more likely to have attended a national (generally more selective) medical school; are more likely to have served on the faculty of a medical school; and are more likely to be board-certified. I speculate on the broader implications this phenomenon poses for the allocation of talent in medicine.
Hat tip to Larry Ribstein at Ideoblog.
Posted by Alex Tabarrok on December 4, 2007 at 07:10 AM in Economics, Medicine | Permalink
Comments
This illustrates a fact that most seem unwilling to face. If we really want to reduce the soaring cost of medicine here (I don't necessarily count myself among those that do), the major target is the high cost of doctors. Obviously, if this is reduced the quality of the people involved will go down over time.
Conversely, if we want to increase the quality of the people in education, we have to increase teacher pay and spend more money.
Posted by: RobbL at Dec 4, 2007 7:28:24 AM
Conversely, if we want to increase the quality of the people in education, we have to increase teacher pay and spend more money.
Money + competition != money alone.
Another reason why unions are bad is member renumeration tends to be tenure based instead of performance-based. So throwing more money at unions tends to be very inefficient as the wrong thing is being rewarded/incentivized.
Posted by: Jody at Dec 4, 2007 7:40:34 AM
This illustrates a fact that most seem unwilling to face. If we really want to reduce the soaring cost of medicine here (I don't necessarily count myself among those that do), the major target is the high cost of doctors.
Only about 20% of the money that the US spends on health care goes to pay doctors. So reduce what doctors are paid by half and you will have cut health care expenditures by about 10%, except then there won't be too many doctors.
Posted by: Ned at Dec 4, 2007 8:16:04 AM
This illustrates a fact that most seem unwilling to face. If we really want to reduce the soaring cost of medicine here (I don't necessarily count myself among those that do), the major target is the high cost of doctors.
Only about 20% of the money that the US spends on health care goes to pay doctors. So reduce what doctors are paid by half and you will have cut health care expenditures by about 10%, except then there won't be too many doctors.
Posted by: Ned at Dec 4, 2007 8:16:33 AM
I don't care how "untalented" those in general care may be compared to their cosmetic surgeon counterparts; from my experience, Japanese doctors and the medical system as a whole is phenomenal compared to what I've experienced in the U.S. The care I'm comparing it to is that which I received from U.S. military insurance and variety of doctors in Michigan.
The Japanese system is so wonderful, it's almost laughable to compare it to the money-mongering of the American healthcare system. As an example, I recently dislocated my kneecap. I went in for one general practitioner's visit in which I was referred to a bone specialist. Left paying $15. Arrived at the bone specialist where they took x-rays, developed them in 15 mins. and confirmed the dislocation, gave me a knee brace and medicine prescription. Left paying $30. Went to the pharmacist right across the street. Paid for topical and pill form medication; paid $10. No filing neccessary. I pay less in taxes annually than I did in America. Didn't get yelled at by the staff in the waiting room like I did in America.
Nearly the same thing happened in the U.S., I fractured small bones in my foot, two years ago. I had to make 4 or so doctor's visits, get x-rays costing over $1000 which took a week to develop and our insurance left us to pay hundreds of dollars for, only so the doctor could tell me that I needed to keep my foot in a brace because there was nothing he could do otherwise. Nice attentive guy though.
Seriously, laughable.
Posted by: Pearl Alexander at Dec 4, 2007 8:26:36 AM
This is purely a supply side comparison. We learn how medical qualification is distributed. Delivery is another issue. If some other system which distributed doctors of particular qualifications more evenly between regulated and unregulated practices was in place, we would still need to evaluate delivery of medical services to see if patients in the regulated sector were better served.
If patients cannot afford to pay for care, themselves or through some governemntal or charitable system, then deliver of actual medical care may be no better than under the present system. It may, in fact, be worse. I don't want to cast asperagus on this guy's effort. This is standard science - going around showing that what you expect to find is what you find in circumstance after circumstance. It doesn't move us along to new understanding, but rather fleshes out the understanding we already have. In particular, it doesn't help us toward a better medical care system. We need to know how to get medical care and medical results to those who need them. That involves actual delivery of service and actual distribution of results, rather than distribution of qualifications.
Posted by: kharris at Dec 4, 2007 9:42:08 AM
Mr. Ramseyer's use of statistics is biased toward the points he wants to make. For example, on page 4 of his paper he compares the mean income for ALL Japanese doctors with the median income of NEW pediatricians and NEW anesthesiologists in the U.S.. Had he compared apples with apples he would have found a much greater disparity.
Doctors in the U.S. are rewarded with incomes that are 50% higher than their counterparts in the rest of the developed world, according to a 2007 McKinsey report, and yet the U.S. longevity rates are middling at best compared to other developed countries. Japan may not have the most entrepreneurial doctors in the world, but the Japanese life expectancy at birth is 82 years versus 78 years in the U.S, according to the CIA's World Factbook.
Japan spends less than half of what the U.S. spends on healthcare), as a percentage of GDP, and yet they live on average 4 years longer per person. It may be that the provision of effective medical care to a nations people doesn't require as much money or talent as Mr. Ramseyer thinks it does.
A basic competence at matching symptoms with treatments according to the current standard of care that prevails in the developed world may be all that's required for an effective medical system that provides long lives to its customers. I'd rather have modestly talented doctors keep me alive for 82 years at a modest cost than haves talented one keep me alive for 78 at more than twice the cost.
Posted by: anon at Dec 4, 2007 10:37:53 AM
"Conversely, if we want to increase the quality of the people in education, we have to increase teacher pay and spend more money."
One problem with this is that we essentially have no idea at present how to identify who is going to be an effective teacher. Some teachers do consistently raise test scores of students, however, the research at present indicates that we don't know how to identify these teachers a priori. Even if you increase the pool of applicants, we still wouldn't know who to hire. Their might be a higher proportion of good teachers in the pool, but I'm not sure that the best ones are motivated by money. You may actually decrease the proportion of good teachers and thus the number of good teachers getting hired.
Posted by: josh at Dec 4, 2007 11:05:32 AM
This is a good argument for placing wage controls on plastic surgeons.
Posted by: Mark at Dec 4, 2007 12:30:39 PM
I think this model might underestimate the goals and motivations of talented people. The Canadian government controls health care costs by limiting medical school admissions, and by paying doctors less than they would make in the less regulated American market. Yet the smartest university students don't seem to go into less regulated job markets - let's say, investment banking - huge numbers apply to medical school. What if talented people also care about prestige and a challenging work environment?
Posted by: Allison at Dec 4, 2007 12:53:50 PM
The data point that 20% of health care expenditures is spent on doctors massively overstates what doctors actually receive. The 20% is the sum spent on doctors services. However, it includes all the expenses the doctors office incurs. Because it includes everything the doctor spends on overhead, equipment, insurance and other employees in the doctors office what the doctors actually receive is well under half of the 20% figure being quoted.
the average average income of a US doctor is on the order of $200,000. That is about the same the manager of your local Wal-Mart, Home Depot or other big box retailer earns. Ok, the doctor earns more than a European doctor, but how does the income of the WMT manager compare to the manager of a foreign retail outlet?
Posted by: spencer at Dec 4, 2007 1:02:12 PM
Allison,
Last time I read, Canada faces a shortage of doctors, and one of the reasons is that they immigrate to the US.
Posted by: Yancey Ward at Dec 4, 2007 1:03:31 PM
Like a few commenters above, I will remind them that compensation for doctors is a relatively small fraction of healthcare costs- much less than is generally believed. Now, if you include all of the people involved in providing healthcare services (technicians, secretaries, nurses, sundry staff of hospitals and clinics like HR, infotech, janitorial, etc.), then you get a significant fraction of total expenditures. Remember, if you advocate controlling costs via controlling salaries and wages, these are people that will also be targeted.
Posted by: Yancey Ward at Dec 4, 2007 1:08:30 PM
Singapore spends half as much, as a percentage of GDP, on healthcare as France. France and Singapore spend half as much, as a percentage of GDP, on doctors as the US. France does it by paying half as much; Singapore by having half as many doctors.
spencer,
I would guess that French doctors are at a lower percentile of the French income distribution than American doctors.
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The routinization of health care is not a bad thing:
http://www.newyorker.com/reporting/2007/12/10/071210fa_fact_gawande?printable=true
Posted by: Lemmy Caution at Dec 7, 2007 4:43:35 PM
This "universal healthcare" plan works the same in Canada. There is no real incentive for giving the best or fastest healthcare possible because there is no real market competition. As mentioned by someone else that commented earlier, this is why a lot of Canadian doctors are coming to work in the U.S. This system seems like a nightmare to me. It's completely a catch 22. You can either pay less and wait forever to be seen by a doctor or you can pay a considerable amount more and be seen in about a week or less.
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