Best of Open Health: Congress Limits the Number of Doctors

Free-market principles can help fix the undersupply of doctors in the US.

Note [M.B.]: Since our inaugural post in June 2022, OpenHealthPolicy has become a valuable outlet for sharing and dissecting policy research. We've shed light on the unintended consequences of policies that strain our healthcare system and have explored market-based solutions to mitigate these challenges. Today, we are immensely proud to celebrate a milestone of 500 active subscribers. A heartfelt thank you goes to everyone who has contributed to making OpenHealthPolicy the outlet it is today!

As we celebrate this achievement, we are excited to revisit our most popular post, Justin Leventhal’s “Congress Limits the Number of Doctors,” a post viewed over 12,000 times since its December 2022 release. An article published in Nature last week echoes our concerns: Projections indicate that physician demand will continue to outpace supply. With the healthcare system grappling with the pressures of an aging population and policies that restrict supply, we could face a shortage of as many as 139,000 physicians by 2033. Leventhal’s analysis is, in other words, as relevant today as it was then. Enjoy!

We also invite you to share any feedback you may have, including topics you’d like to see more of, in the comments. We value your input as we explore the policies shaping our healthcare system.

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Covid-19 exposed a lack of medical personnel in the United States to meet a national emergency, but a shortage of doctors has been a problem in the US for years. The number of doctors is a function of how many new doctors are admitted to the profession and how many leave the practice of medicine each year. The supply of new entrants is constrained primarily by the Centers for Medicare & Medicaid Services (CMS), a federal agency that provides the bulk of the funding for hospital residencies.

Hospital residencies are positions for recent medical school graduates to work in a clinical setting – usually at a hospital or doctor’s office – treating patients and continuing their training in a particular subfield. Residency durations vary by specialty. Even after medical school, an MD cannot obtain a license to practice medicine without at least one year of residency. The number of residency slots directly determines the number of licensed doctors entering practice.

CMS residency funding was capped beginning in 1997 at 1996 levels, and has only been raised once since then in Section 126 of the Consolidated Appropriations Act of 2021. From 1987 to 1997 the number of residents grew by 20.6%, while from 1997 to 2007 the growth in residencies was only 8%. The 2021 law attempts to address several issues by slowly increasing residencies in specific underserved situations such as rural areas. This officially just began with 200 new residencies nationwide this year, climbing to 1,000 additional residencies per year in five years. It is only a drop in the bucket compared to the 140,000 resident doctors in the US in 2020, the majority of whom were federally funded. Using a rough estimate from Census population data for 2000 and 2020, there are at least 50 million, or 18%, more people in the nation today than when the law was passed, making the current change a rather small effort.

This growth in population without a corresponding growth in the doctors we train each year leads to higher salaries for doctors and higher costs for patients. More people are demanding the time of a similar number of doctors, driving up the price of doctor’s time, even before accounting for the US’ aging population.

The law of supply and demand predicts that a larger supply of doctors would drive down the cost of doctors’ services as well as how much they are paid. The 1997 restriction on supply of residencies was originally lobbied for by the American Medical Association (AMA), the main professional association and lobbying group for doctors. The AMA now recognizes the shortages this created and is encouraging Congress to remove the limit. US healthcare costs are rising at a pace that the profession is actively asking for a change that will increase competition for its members. Increased supply of anything, even doctors, means decreased prices, all else being equal.

General (or family) medicine takes three years of residency while specialties can require up to seven years. Compared to general medicine, these extra years provide a doctor with an increased salary netting $1 million to $3 million dollars extra of lifetime earnings. While having an adequate supply of doctors is beneficial to patients and hospitals, practicing medicine is massively lucrative compared to almost any other occupation. Income for doctors is a large incentive to pay for education. The lowest average annual salary for physicians in a state is $149,557 per year in Georgia, according to ZipRecruiter, while some specialties have average annual incomes of a quarter to over a half a million dollars a year.

Solution 1: Just raise the cap above 100,000 residents

Removing the CMS caps will certainly increase the number of residents, but it requires more federal spending when the federal government is already running annual deficits. Half of hospitals receive more than $150,000 per resident, and the quarter of hospitals receiving the lowest payments can range up to more than $100,000. Even if politically achievable, it runs the risk of further increasing the national debt, without some form of new dedicated funding.

There remains the problem of trying to calculate from the top down the right number of doctors needed today, let alone anticipating needs in in five or 10 years. Dictating from above the number of medical professionals needed is arbitrary and static, not taking into account changes in the healthcare market.

Central planning disrupts the ability of the price system to communicate how many doctors are needed though the costs of training and salary. A static and rigid system will constantly under-provide new doctors if it is tailored to past needs, which is likely given how slowly it can be changed. Case in point, the 1997 levels were held constant almost for 25 years.

Removing caps would likely encourage hospitals to apply for funding for more residencies. Currently not all applications by hospitals are granted, indicating that a removal of caps would increase spending by CMS for residency programs. Medical residents are relatively cheap labor compared to nurse practitioners and physician assistants, incentivizing hospitals to try to get more funding for more residencies.

Solution 2: Require hospitals to pay for more of residents’ costs

It is clear that residents are an economic boon for hospitals. The salary of a resident doctor is lower than for nurse practitioners and physician assistants but the resident doctors work more hours. There is also evidence that resident doctors improve patient outcomes, and that teaching hospitals – with more residents – have better outcomes than non-teaching hospitals. Residency programs allow for 24-hour physician coverage and multiple assessments of a patient.

One study looked specifically at the ways in which residents are both an input to hospital productivity and an output for learning purposes and found residents to be an overall input to hospital production, with productivity around 37% of senior physicians. As an overall input we should expect that hospitals would take this burden on so long as they could pay the residents accordingly.

Given the financial incentives to hire residents, hospitals could take on a larger proportion of funding their residencies. One way to achieve this would be to cap the total amount given for each residency. This would allow for a larger number of residencies to be supported by the same money, while shifting more of the responsibility for training residents onto hospitals to reflect the benefits hospitals receive from residents.

The downside of this idea is that increasing hospital costs will need to be paid for by someone, and this may be reflected in hospital pricing. Increasing the overhead costs of hospitals will increase the cost of running the hospital and thus healthcare prices potentially as well. This may be mitigated to a degree by the fact that residency programs already have a net positive effect on hospital finances.

Solution 3: Doctors repay some of the cost of their residency once it is completed

What is preventing private funding in the form of loans or some other mechanism from forming to arbitrage this high salary situation? Currently the private sources of funding for residencies are through the higher rates private insurers pay to teaching hospitals that supplement these programs. However, it is difficult to calculate the amount. Despite private gains in the form of higher wages, we don’t expect residents to take out loans to pay for any portion of this part of their education, despite the higher wages a medical school graduate can command after completing a residency. If the problem with hiring more residents is the cost of them, then borrowing the money to pay the hospital for training arbitrages the potential higher earnings.

Personal loans can respond to market forces to balance the supply and demand for doctors with incoming entrants via the price mechanism, by balancing the salaries of doctors against the loans required to earn them. Currently the salaries of all physician fields are enough to cover the cost of these loans, despite the high costs of residencies. Shifting to a system where residents are expected to bear some of the costs of their post-med school training would allow CMS financial support for residencies to support a larger supply of new doctors without increased federal spending..

Alternatively to loans, doctors whose residencies are supported by CMS could be required to repay a portion of the cost to CMS over a period of several years after the completion of their residency. This method would reduce the risk that a resident would have large loans despite not completing their residency by requiring only those who incur the benefits of higher earnings to repay CMS.

The entirety of the cost does not need to be placed on doctors. This can easily be combined with the suggestion above, as hospitals benefit from the resident doctors as well. Doctors typically graduate medical school with about $200,000 of debt. However, this is also what many doctors make in a single year. While it is a lot of money to be paid back, it is relatively small compared to the increase in earnings that debt allows.

While government funding is not going away, it could be better used to supplement a price incentivized system instead of acting as top-down central planning. Given the high salaries of doctors, taking on a portion of the cost is unlikely to deter enough medical students that expanded residency slots would go unfilled. Federal support for residencies could reflect the provision of public goods, as well as encourage doctors to locate in rural and other underserved communities. Rural doctors, for example, often earn less and could be disincentivized compared to higher paid city doctors and CMS could waive part of their repayment to encourage doctors to practice in those communities.

Adding an additional cost for medical training would be a disincentive for people choosing to become a physician. However, the barrier to more students is currently due to the reliance on a top-down system that limits the number of residents. Rebalancing the way residencies are paid for would allow for more doctors in the long run and could incorporate some private payment for the private financial benefits of residencies. A system of loans to pay for some portion of medical residencies would be imperfect but far more responsive and effective at meeting demand for care than having one agency guess at the medical needs of more than 330 million people.