The Return on Investment for Law, Business, and Medical School

My last post resulted from a search in which I was looking for general information about the cost of law, business and medical school, in response to what I found to be a dubious assertion from the AEI.

But it may surprise some readers to learn that the sizable rates of return for doctors appear to be less than for other professional degrees such as in business or law. Dentists and physician specialists have comparable rates of return, but primary care doctors have lower—albeit still impressive—rates of return. This is consistent with the general impression that primary care doctors are “underpaid” relative to specialists. Not surprisingly, there is a shortage of primary care doctors.

Frankly, given that the authors wrote a book on this subject, you would think that they would offer a bit more certitude than "appear to be" - the reason that readers would be surprised by the authors' assertion is that the authors "appear to be" wrong.

Upon re-examining the assertion and accompanying graph, and noting the lack of reference to sources or data beyond reference to the authors' recently published book, there didn't seen to be much of a point in tracking down the data. The authors reference "Hours-adjusted annualized internal rate of return on educational investment over a working lifetime", which I infer to mean that they divided cost of training by hours of training... although with medical school that raises the question of whether you should (or whether they did) include residency training along with medical school itself. The authors also speak of the rise in CEO pay, "rising from less than 60 times average U.S. worker compensation in 1940 to more than 100 times that average by 2004", making me wonder if the projections for the return on investment for law school are also predicated upon data that is now, to put it mildly, extremely dated and bearing little relevance to the present legal job market.

Here's the thing: when you break down the cost of getting a MBA (two years) or JD (three years) against a getting a MD (four years of medical school followed by a residency) to an hourly figure, you are intentionally distorting the cost-benefit analysis by pretending that the programs could be the same length. First, medical school is more expensive than business school or law school. Second, it's a longer program. Let's imagine an investment where you can contribute $X per year, with a rate of return that diminishes slightly with each additional year. You pick a fixed number of years, make your investment, and you're done. Your two year (business school) investment will provide a greater 'rate of return' than your four (or more) year (medical school) investment, but with a smaller contribution per year and a lower number of years of contribution, odds are you'll still look back in twenty or thirty years and think, "Wow, think how much better off I would be had I gone for that four+ year investment plan." A comparison of this type really only works if the cost of tuition is comparable and the length of the program is comparable: Once you have an MBA, you're done - you can't re-enroll for another two years in order to increase the size of your investment.

The authors' conclusions, although not atypical of the quality of AEI scholarship, verge on platitudinous:

It is well-known that much of the difference in healthcare spending between the United States and other nations can be attributed to the higher prices Americans pay for medical care. But the foregoing comparisons suggest that high prices for health labor in the United States might simply reflect higher returns to skilled labor across the board. After all, if we were “overpaying” doctors, we would expect to see a doctor surplus. Yet this is not what we observe. Paying doctors less would not benefit the country as a whole. That is, every dollar saved by consumers also would be one less dollar of income for doctors. Moreover, if doctors were paid much less, more people might get MBAs or law degrees instead. This would surely reduce health spending, but reasonable people might disagree on whether it would improve social welfare.

First the largest contributors to the cost of medical care are, from most costly to least costly, pharmaceutical costs, facilities costs and doctor salaries. If you are going to overlook the first two cost factors and suggest that we're simply looking at an American preference to give higher pay for skilled labor, you're not even trying to build a case. Physician salaries represent roughly 20% of medical costs. If we paid doctors nothing our nation's healthcare system would remain the most costly in the developed world. Medical schools routinely reject qualified applicants. We can easily expand our nation's pool of doctors by expanding medical schools, funding more residencies, and creating an easier path for foreign doctors to qualify to practice in the United States. The constraints we impose do lead to higher salaries for doctors, but through the distortion of the education and labor markets.

In terms of a "doctor surplus", there's in fact an artificial shortage of doctors in the U.S., driven in no small part by the AMA's successful obstruction of the expansion of medical schools, and also from immigration and accreditation policies that make the U.S. market unattractive to doctors in foreign nations who would otherwise be happy to practice in the U.S. Would lower salaries deter people from becoming doctors? Given that among nations in the Organization for Economic Co-operation and Development (OECD), nations other than the U.S. have significantly more doctors per capita, that would not appear to be a valid concern.

The argument that "We don't get any real savings if we pay doctors less, because every dollar saved by a consumer 'would be one less dollar of income for doctors'" - why, then, are AEI's scholars in a constant tizzy about labor unions, taxes on the wealthy, teacher salaries, whether government workers are overpaid, the minimum wage... it all comes out in the wash, right? How about this: We can legislate market distortions and subsidies that increase lawyer salaries to the tune of $1 billion per year and, when people complain, respond, "Paying lawyers less would not benefit the country as a whole, because every dollar saved by consumers also would be one less dollar of income for lawyers." Sound good?

I'll go back to something I said a few weeks ago:

You want the public to subsidize medical schools and residencies, so that you graduate with a lower debt load and, after your initial medical education, have a more comfortable lifestyle? I'm listening - if we give you that, what are you offering in return? How about we reduce compensation for medical care to an amount more in line with the amounts paid by the rest of the world? Do we have a deal?

You know what else that proposal would do? Massively increase the "return on investment" for medical school under the model described above, even though doctor salaries would drop. Go figure.