Over a lunch of burgers and envy, Mallesh Pai and discussed an odd feature of medical reidencies. This post is a summary of that discussion. It began with this question: Who should pay for the apprenticeship portion of a Doctor’s training? In the US, the apprenticeship, residency, is covered by Medicare. This was `enshrined’ in the 1965 act that established Medicare:

Educational activities enhance the quality of care in an institution, and it is intended, until the community undertakes to bear such education costs in some other way, that a part of the net cost of such activities (including stipends of trainees, as well as compensation of teachers and other costs) should be borne to an appropriate extent by the hospital insurance program .

House Report, Number 213, 89th Congress, 1st session 32 (1965) and Senate Report, Number 404 Pt. 1 89th Congress 1 Session 36 (1965)).

Each year about $9.5 billion in medicare funds and another $2 billion in medicaid dollars go towards residency programs. There is also state government support (multiplied by Federal matching funds). At 100K residents a year, this translates into about about $100 K per resident. The actual amounts each program receives per resident can vary (we’ve seen figures in the range of $50K to $150K) because of the formula used to compute the subsidy. In 1997, Congress capped the amount that Medicare would provide, which results in about 30K medical school graduates competing for about 22.5K slots.

Why should the costs of apprenticeship be borne by the government? Lawyers, also undertake 7 years of studies before they apprentice. The cost of their apprenticeship is borne by the organization that hires them out of law school. What makes Physicians different?

Two arguments we are aware of. First, were one to rely on the market to supply physicians, it is possible that we might get to few (think of booms and busts) in some periods. Assuming sufficient risk aversion on the part of society, there will be an interest in ensuring a sufficient supply of physicians. Note similar arguments are also used to justify farm subsidies. In other words, insurance against shortfalls. Interestingly, we know of no Lawyer with the `dershowitz’ to make such a claim. Perhaps, Dick the butcher (Henry VI, Part 2 Act 4) has cowed them.

The second is summarized in the following from Gbadebo and Reinhardt:

“Thus, it might be argued … that the complete self-financing of medical education with interest-bearing debt … would so commercialize the medical profession as to rob it of its traditional ethos to always put the interest of patients above its own. Indeed, it can be argued that even the current extent of partial financing of their education by medical students has so indebted them as to place the profession’s traditional ethos in peril.”

Note, the Scottish master said as much:

“We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labour.”

Interestingly, he includes Lawyers.

If we turn the clock back to before WWII, Hospitals paid for trainees (since internships were based in hospitals, not medical schools) and recovered the costs from patient charges. Interns were inexpensive and provided cheap labor. After WWII, the GI Bill provides subsidies for graduate medical education, residency slots increased and institutions were able to pass along the costs to insurers. Medicare opened up the spigot and residencies become firmly ensconced in the system. Not only do they provide training but they allow hospitals to perform a variety of other functions such as care for the indigent at lower cost than otherwise.

Ignoring the complications associated with the complementary activities that surround residency programs, who should pay for the residency? Three obvious candidates: insurers, hospitals and the doctors themselves. From Coase we know that in a world without frictions, it does not matter. With frictions, who knows?

Having medicare pay makes residency slots an endowment to the institution. The slots assign to a hospital will not reflect what’s best for the intern or the healthcare system. Indeed a recent report by from the Institute of Medicine summarizes some of these distortions.  However, their response to is urge for better rules governing the distribution of monies.

If hospitals themselves pay, its unclear what the effect might be. For example, as residents costs less than doctors, large hospitals my bulk up of residents and reduce their reliance of doctors. However, assuming no increases in the supply of residents, wages for residents will rise etc etc. If insurers pay there might be overprovision of residents.

What about doctors? To practice, a doctor must have a license. The renewal fee on a medical license is, at the top end (California), around $450 a year. In Florida it is about half that amount. There are currently about 800K active physicians in the US. To recover $10 billion (current cost of residency programs) one would have to raise the fee by a $1000 a year at least. The average annual salary for the least remunerative specialties is around $150K. At the high end about $400K. From these summary statistics, it does not appear that an extra $1K a year will break the bank, or corrupt physicians, particularly if it is pegged as a percentage rather than flat amount. The monies collected can be funneled to the program in which the physician completed his or her residency.