Baseline Scenario -- Hedge Funds and Doctors' Pay

The Baseline Scenario
Questions about Doctors
Posted: 26 Jun 2009 01:30 PM PDT
Greg Mankiw posts data showing that doctors in the U.S. make much more than doctors elsewhere. From a 1999 paper by Uwe Reinhardt, among others:
As a dollar amount, U.S. per capita spending for physician services was the highest in the OECD in 1999: $988, compared with an OECD median of $342. . . .
In 1996, the most recent year for which data are available for multiple countries, the average U.S. physician income was $199,000. The comparable OECD median physician income was $70,324.* The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.
Mankiw posts three discussion questions. I’m just going to take a stab at the second one:
On the issue of doctor training: Suppose that in country A physicians get free training through a taxpayer-financed educational system, while in country B physicians finance their own education and then, once trained, are paid higher fees. (a) If country A classifies these training expenses as education rather than healthcare spending, which country would report higher healthcare costs? (b) Is that difference in healthcare costs real or an artifact of labeling? (c) In which country would doctors, once trained, have more incentive to work long hours? (d) In which country would there be more doctors? (e) Which country’s system, in your judgment, is more efficient and equitable?
(a)-(b) I get Mankiw’s rhetorical point. And I guess it makes sense to count educational costs as part of the production costs of healthcare. But $199,000 – $70,000 = $120,000. So the higher med-school costs people pay in the U.S. get made up in two years out of a career of 30-40 years.
(c) The short answer is that physicians would have more incentive in country B (the U.S.), because the marginal return on labor is higher. But do we want doctors working longer hours? Medicine is not like, say, baking bread – the more hours you put in, the more good stuff you end up with. We are already the country with the highest hourly wages, and one of our major problems is not lack of doctoring capacity, at least not in aggregate; on the contrary, we have the problem of overutilization of many types of services (the expensive ones). Put another way, because we have higher wages for expensive procedures, we have doctors working longer hours doing those procedures by prescribing more of those procedures than are medically appropriate. Because we overcompensate for some services and undercompensate for others (relative to each other), we have too few of some kinds of doctors (family practice, for example) – but that is a product of the way we pay for healthcare, not the way we produce doctors.
(d) You should get more doctors in whichever country gives you the higher aggregate returns to being a doctor. Right now that’s the U.S. But the key point here is not the financing of medical school; it’s the constraint on the number of doctors enforced by the American Medical Association. That’s why, as Mankiw points out, we actually have fewer doctors per capita than the average OECD country.
(e) I’ll leave that as an exercise for you.
* Yes, it says “average” for the U.S. and “median” for the OECD. I can’t tell from the original paper if that is accurate or not. The rest of the paragraph says it is dealing with averages. In any case, I think it’s fair to assume that the median U.S. doctor made well over $70,324 in 1996.

Hedge Funds Make A Political Mistake
Posted: 26 Jun 2009 03:08 AM PDT
The political flavor of the month is to push back against even the Obama adminstration’s mildly reformist inclinations on finance (e.g., Peter Weinberg in today’s FT is a nice example). And, of course, once you hire a lobbyist, he or she tells you that “winning” means stirring up Congress in favor of the status quo. Measured in these terms, the hedge fund industry has had a string of notable recent victories effectively preventing tighter regulation.
Advocates have a point, of course, when they argue that big banks rather than hedge funds were primarily responsible for crisis. But this misses where we are in the long-cycle of regulation/deregulation. Look at this picture (source: WSJ; more on Ariell Reshef’s webpage).
If we’re at the top of the long deregulation wave and likely headed for tighter control of the financial sector – if not this year, then soon – where do you want to be in the political equation?
You can resist change, but this is just asking for trouble. You know that individual (lightly regulated) funds – whether or not these are officially “hedge funds” is irrelevant - will have high profile trouble. The latest alleged tunneling details in the case of Danny Pang are a precursor to broader social fascination with this phenomenon – you know that a dozen screenwriters are already at work. Sooner or later, there will be a more focused backlash against specific practices revealed or implied in this kind of case.
At the same time, the broader Treasury attempt to respond with only milder controls over big banks will likely also run into trouble (see my latest Economix column), so more social pressure will appear from that direction also. Big banks repeatedly get into serious scrapes, but their political clout consistently allows them to deflect attention onto others. The idea that big banks and hedge funds have some natural congruence of political interests in this space is simply wrong.
In fact, if hedge funds dig in too deeply with “the crisis was not our fault” position, that is just asking for trouble – and to be scapegoated – down the road. It would be much smarter to get out ahead of the political dynamic, and to propose ways to measure, control, and regulate risk.
Voluntarily keeping hedge funds “small enough to fail,” without endangering the system, would also make sense – particularly if accompanied by a complementary political strategy that emphasizes that it is big banks that have done almost all the damage.
By Simon Johnson