Editorial: Are doctors' salaries responsible for the health-care financing crisis?

September 1, 2007

Our fee-for-service payment system drives up both physician and hospital costs because there's no free market for such services to restrain prices.

Key Points

IN SUPPORT of the first claim, the author cited the statistic that US physicians earn two to three times as much as doctors in other industrialized nations. He pointed out that while "American doctors make an average of $200,000 to $300,000 a year," European doctors make $60,000 to $120,000 annually. However, the editorialist neglected to mention that the average US worker's per capita income is 30% higher than that of Europeans. Moreover, this disparity is almost entirely a reflection of the fewer hours worked per week by Europeans compared to their US colleagues, their longer and more frequent vacations, and higher marginal tax rates, a primary deterrent to productivity.2 Indeed, all these factors are particularly true as regards physicians, explaining our higher comparable pay scale. I will not belabor the point that US physician salaries are dwarfed by that of hedge fund managers, successful trial lawyers, and professional athletes (and I will leave it to readers to judge the relative contributions to humanity of these various groups).

HOWEVER, WHILE THE EDITORIAL raised my blood pressure as regards physicians' salaries, I did have to reluctantly agree with the author's assertion about the adverse economic impact brought on by the manner in which US physicians are compensated. The current fee-for-service payment scheme does precisely what it is designed for: It pays for services, which is why US physicians provide far more services per capita than their European colleagues, driving up our costs.

What's really driving up costs?

So why is US health care so expensive? Firstly, we have exceptionally high administrative costs-31% of total spending in one recent estimate.4 This is about three and a half times the per capita administrative costs of Canadian health care. While 19% of all US hospital full-time employee efforts are in administrative categories, less than 8% of European hospital employees are so engaged.5 In addition, US hospitals have over five times the number of employees dedicated to financial services than our European colleagues.

As noted, these costs are a reflection of our payment scheme. Hospitals are also paid in a fee-for-service mode-and not on the basis of the overall health of their patients. Thus, it's critical that they perform as many services as possible and bill and collect for every one of them. Another cause of high hospital costs is their intense competition to offer more and more elaborate services, often of unsubstantiated benefit (e.g., robotic surgery and PET scans), to more and more patients. This has created an enormous technological overcapacity, further driving up costs.