Weeks et al., "Comparison of Educational Costs and Incomes of Physicians ..."

• Rationale for computing rate of return and net present value of investments in education
• How this is done: direct cost (tuition and fees, room & board); opportunity cost, income, hours of work adjustment
• Present value and internal rate of return defined (see glossary p. 1281)

• Measured returns for several occupations: business, law, medicine (procedure-oriented and primary care), and dentistry
• Tried to control for grade-point averages in occupations at entry--why this is important to do
• Measured tuition and fees, length of training, opportunity cost (income of high-school graduate employed full time)
• Used median incomes (age-specific). Not available for business past first year post graduate
• Held hours of work constant
• For physician specialties, accounted for length of residency programs assuming completion without interruption
• Various sensitivity analyses performed (see Table 3)
• Used different discount rates (5%, 7.5%, 10%): impact of different discount rates
• Calculations from time of high school graduation

• Rates of return (initial estimates in Table 3): business 29.0%; law 25.4%; dentistry 20.7%; procedure-based medicine
• 20.9%; primary care medicine 15.3%
• NPV: ranking from top to bottom (5% discount rate)--procedure-based specialty medicine, law, dentistry, business, and primary care medicine
• With higher discount rates, relative ranking of NPV between dentistry and business reverses
• Sensitivity analysis indicates that regardless of adjustments, primary care medicine at the bottom
• See in Fig. 2, cumulative hours-adjusted NPV of educational investments in various careers

• Investment in professional education yields substantial financial rewards.
• Relatively brief training periods of attorneys and businesspersons helps their RORs.
• NPV less sensitive to lengthy training period, more weight on incomes earned subsequently
• Burstein et al.: ROR for law

• Profitability of investments assume today’s costs and returns
• Returns based on medians. Implications of this.
• Did not account for differences in risk among professions
• Ignored nonpecuniary benefits

• Can use RBRVS to influence relative returns of primary care and other physicians
• If incomes of physicians held down, will encourage entry into business and law
• Enormous costs of medical education could be reduced

• Physician Firm and Its Production Function
• Production function for MD services: constrained by technical and legal factors
• Studies by Reinhardt in early 1970s: esimated production function for physician practices; dependent variables were total visits, office visits, and total revenue; independent variables were aides’ hours, physician hours, and capital.

Why Observe Ratio of MP of MDs to MD wage < Ratio of MP of Aides to Aide Wage

• May be wrong price ratio for aides and other non MD inputs. May be more costly to hire aides than we think (inc.l. psych. cost)
• Physicians may want to see patients rather than just profit max. or income-leisure max.
• Threat of medical malpractice suits
• Price of MD services reflects MD attention
• Marg. revenue product of aides biased

Economics of Group Practice

• Have variety of practice types: solo, single specialty groups, multispecialty groups
• Motives for groups: expense sharing to exploit scale economics; coverage of patients; peer review and consultation; more bargaining power with other groups and with health plans
• Problem with group--maintain individual MD’s incentives cost and quality (R v. (1/N)*C)

• U = U(X,L); X = consumption of goods; L = leisure
• Graph let pX = 1, wage = w; isolate income and substitution effects; conditions under which supply of labor curve is backward-bending
• Empirical evidence: Culler and Bazoli; Sloan

• Procedure: CPR or modified CPR v. Fixed fee, either charge-based or cost-based
• Case: office visit package (e.g., OB care)
• Episode:care provided by MD for inpatient care; special inpatient procedure packages as for transplants
• Capitation: All acute; MD services only; Special disease packages --> handout

• Rationale for RBRVS: CPR inflationary; fees favored procedure-oriented, including invasive, over "cognitive" services
• How constructed
• Evaluation of method
• Other approaches: relative value scales, such as for California
• Antitrust issues

• Large study in 1988 at Harvard School of Public Health (Hsiao)
• Developed for 7,000+ different activities of physicians. Extrapolated to larger number by studying content of 372 activities--explicitly allowed for evaluation/management, risk, stress, etc. as well as performing procedures (e.g., invasive procedures)
• Hsiao et al. simulated effects of RBRVS on Medicare Part B payments--found that Medicare payments for E/M services would rise by 56% and payments for procedures would fall: invasive procedures--42%; lab 5%; imaging--30%

• Enables Medicare to gain better control over Part B payments. Describe caps.
• But there is distinction between a cost-based scheme and one based on willingness-to-pay
• RBRVS does not change physician incentives
• Relative value scales may facilitate collusion. Antitrust issue.