SDA #8: The Game Theory Behind Healthcare in the US - Doctor Compensation

After over two years in Goizueta Business School, I took Access to Healthcare at Rollins School of Public Health. I will be an administrative fellow at Texas Children's Hospital starting in July and I figured I mine as well see what is brewing in the discipline as I enter a highly sophisticated institution. What I learned was most interesting. There are 3 areas that most people blame for USA's cost of healthcare (standing at 17% of GDP at the moment).



1. Administrative costs

2. CEO pay

3. Insurance companies



As a good business school student, it caught my attention that all of these actually were blaming the business function of the sector as the scapegoat for the problem. It seemed that all major medical publications also backed this theory. I decided to see what my friends in the "business world" thought of what drives cost. I found a great document from the gurus at Mckinsey (http://www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp) that argued a different reality. Three of the main drivers in the report are:



1. Administrative costs (due to the complicated multi-payer system)

2. Physician Pay (8 of 10 highest paid US occupations are physicians - CEO is number 8) See: http://www.bls.gov/bls/blswage.htm

3. Consumer use of new drugs (Americans tend to buy and use the latest and greatest drug - paying premium price over generic)



This got me to thinking about the healthcare game and in particular how did physicians end up getting paid more than 6 times their counterparts in developed countries...one thing I was curious about was one of the major issues in the Public Health schools was how to get Doctors to treat people in rural/poor/crime-heavy/ugly places...I thought this interesting because in the business world to get managers to move to Kansas City or bodunk Oklahoma is not an issue because there are 15 MBAs waiting in line to take a position with a good company eventhough it is not in NYC...



A major part of the game is played between the Ameican Medical Association and the US government. American Medical Association has been pretty smart to limit the access to medical education and, of course, they will site that is because "people are saving lives" and the "quality must be perfect" and this is true but interesting if compared to business education where the if you are innovative and driven we will take you, train you, and teach you to perform...



The business world then creates a equilibrium where supply of MBAs slightly exceeds demand in turn driving competition for jobs and price checks on the price of an MBA...let's just say that the average MBA with the same amount of experience as a physician will not be making $250K a year when they are 50...unless of course they work for HP and bonuses kick-in...this is not to say that managers are not overpaid as well but supply demand actually works...



Now, let's turn to the medical profession...limited supply+extreme demand = supplier power!!! Do I hear monopoly? Doctors are no dummies...they actually are not over-paid in the current equation but what would happen if they doubled their supply...the equation would lessen and they might just have to compete on efficiency and productivity...



Last week on Grey's Anatomy, a fictitious example happened where 3 doctors were competing in to see who could be the "most productive" physician which meant treating the most cases...running tests gave physician points...in one day one patient a physician spent $125000 on tests...in the business world this would not happen...



The problem I see is that unfortunately it looks as if noone is home in this game on the American people or government side of things...or that physicians are the players on both sides of the table...colluding and quickly agreeing that the problem does not reside on the spending habits of physicians but in turn on those that manage the spending of medical practitioners...maybe one side needs to wake up or overthrow the party...