Commentary: Let The Market For Doctors Heal Itself

Ah, good intentions. Three decades ago, when the nation appeared to face a paucity of physicians, the federal government stepped in with a solution: pay hospitals for each medical resident they trained. It was, arguably, an enlightened notion. Washington would guarantee on-the-job medical education at a time when insurers, hospitals, or doctors had little direct economic interest in funding residencies themselves. This was nascent industrial policy, a venture that tied together the interests of health care and the nation.

Like any subsidy worth its salt, though, this one went screwy. In 1983, the Health Care Financing Administration (HCFA), which oversees both Medicare and the resident incentives, sought to ensure medical care for the poor by adding a premium--based on each hospital's number of residents--to the amount it reimbursed for care of Medicare patients. Hospitals with more residents, it reasoned, would tend to care for more poor people.

SLASH SUBSIDIES. Instead, the indirect payment turned out to be a strikingly inefficient way to finance indigent care. Added to the original incentive, moreover, it created a horrifically expensive means of training doctors. In New York, the HCFA currently pays hospitals an average of $87,000 annually for each of the residents who, just out of med school, typically make $40,000. The HCFA faces a training tab this year of more than $7 billion.

There is a simple way out of this mess: Get the government out of the physician labor market. Reduce sharply the subsidy per resident, forcing hospitals to pay trainees' salaries and so discouraging them from taking on as many residents as they have lockers for. Compensate hospitals for indigent care, but do so on a per-patient basis instead of funding a pool of physicians who may or may not help the poor.

This isn't the route the government chose on Feb. 17. Borrowing a trick from the old Agriculture Dept. playbook, it's rewarding hospitals to let their training fields lie fallow. The HCFA experimentally will pay 42 New York medical centers $400 million over six years to eliminate as many as 25% of their resident slots. Convinced that the world has too many doctors--and far too many specialists--it will add bonuses for hospitals that up the proportion of residents in primary care. In return, it will save $700 million it would have spent on incentives. "We'll put them on a diet and discover what they really can do," says Thomas Gustafson, deputy director of the HCFA's Office of Research & Demonstrations.

This is a terrific deal for the 42 hospitals. None will jump off Medicare's gravy train without a push, yet everyone realizes that "one of these days, somebody is drastically going to alter medical education reimbursement," as James Tallon, president of the United Hospital Fund of New York, puts it. Already, insurers are cutting premiums that help cover research and teaching overhead. And President Clinton's 1998 budget calls for a cap on the number of residents and a reduction in the subsidies hospitals receive.

So, fine--the world is changing, and hospitals had better change with it. But these institutions, so long overfunded, don't deserve another palliative to ease the transition. More troubling are the confusing economic signals HCFA's deal sends. The agency still will pay hospitals more than residents are worth but now will try to control supply based on guesstimates of health industry needs.

That sort of micromanagement is a risky endeavor. It's not clear, after all, that physician supply is out of whack. After a downtick in 1994, pay for both primary-care doctors and specialists is growing again. Record numbers of applicants are beating down medical school doors. And some health-maintenance organizations, admitting that generalist "gatekeepers" aren't the perfect cure-all, are reemphasizing specialist care. We may discover, in five years, that the HCFA is funding the creation of too many primary-care doctors.

Why not let the market determine the right balance? Over time, the supply of physicians will modulate according to entrants' economic expectations--and that's entirely appropriate. Subsidies only distort the process, usually sending resources to the wrong places at the wrong times. Cut the subsidies and remove the inefficiencies, and we'll get as many doctors as we need.