Just how much do physicians earn — and why?

Physicians are among the highest earners in the United States, averaging $350,000 in annual earnings. And their salary figures are frequently cited as an important force driving high health-care costs.

However, new research by Stanford health economist Maria Polyakova and colleagues — using unique data on physician income — shows that physicians’ personal earnings account for only 8.6 percent of national health-care spending.

The working paper, released by the National Bureau of Economic Research, uses individual tax records from 2005 through 2017 for nearly a million U.S. physicians to document how earnings vary over a physician’s life, examine major differences in earnings across specialties, regions and the type and size of health-care institutions and private practices. Physician income depends on where they go to medical school and whether they become primary care physicians or specialists like neurosurgeons. The complexity of physicians’ incomes that are usually a combination of wage and business income make it hard to get a simple take on physician income. 

“This mishmash of sources makes it particularly challenging to study physician earnings,” writes Polyakova, an assistant professor of health policy at the Stanford School of Medicine and a faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR). Indeed, she and her coauthors find that survey reports of physicians’ incomes underestimate earnings by as much as 25 percent. Yet understanding the financial incentives that potential physicians face when deciding to enter the occupation is crucially important. 

“This occupation merits detailed study as a large share of high earners in the United States are physicians and physicians are seen as playing a key role in driving the society’s well-being, so documenting their labor market rewards is central to understanding how society values and allocates top talent,” the researchers write.

Specialty choice

Specialty choice is particularly important because it is sticky; once physicians decide early in their careers, they are unlikely to change specialty later on in their careers, so their initial choice has long-term ramifications.

They estimated that increasing primary care income by 5 percent would boost the probability of graduates from top medical schools entering primary care by nearly 5 percent. For existing physicians, who already chose their specialty, the researchers found that increasing Medicare reimbursement and increases in health insurance coverage in the population can slow down retirements.

Such findings are crucial as there is a severe shortage of primary care physicians in this country.

Polyakova, who is also a core faculty member at Stanford Health Policy, coauthored the study with Joshua D. Gottlieb of the University of Chicago; Hugh Shiplett of the University of New Brunswick; and Kevin Rinz and Victoria Udalova of the U.S. Census Bureau. Udalova was a former Government Visitor at SIEPR during a period of this research.

The researchers used two types of policy variation — changes to insurance coverage and to payment rates per service — to distinguish the government’s influence from other differences across markets that impact physicians’ earnings and labor supply.

“The government’s influence is dramatic,” they write. “When Medicare reimbursements change, one quarter of marginal revenue from public and private insurance flows into physician earnings. When the ACA permanently increased insurance coverage, 6 percent of public spending accrued to physicians personally.” 

More than 25 percent of physicians in 2017 earned above $425,000 annually and the top 1 percent of physicians averaged $4 million in annual earnings — 10 times the average annual earnings in the sample and more than twice the average earnings in the top 5 percent. Those top earning physicians are 67 percent more likely than the average earner to have attended one of the top five medical schools — such as Stanford, which only admits 2.2 percent of applicants — and 38 percent as likely to work in primary care. Women physicians, on the other hand, on average earn 30 percent less than their male counterparts, and only a third of this difference can be explained by differences in specialty choices. 

The authors conclude that government payment rules have a profound impact on earnings and thus play a key role in valuing and allocating one of society’s most expensive assets: physicians.

“Our results teach how policy drives the most consequential long-run outcomes in this labor market and provide a clear agenda for the future,” they write. “To analyze the long-run welfare impacts of healthcare policies, including those we investigate, we need evidence on the distribution of health impacts and thus social returns to physician ability in different specialties."

This story was originally published on July 27 by Stanford Health Policy, a joint effort of the Freeman Spogli Institute for International Studies and the Stanford School of Medicine.