Health Economics- Lecture Ch16

8/3/2019 Health Economics- Lecture Ch16

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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?

Health Economics- Lecture Ch16

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