THE PHYSICIAN LABOR MARKET IN A MANAGED CARE‐DOMINATED ENVIRONMENT

I. INTRODUCTION Health maintenance organizations (HMOs) and other managed care arrangements are rapidly growing alternatives to fee-for-service (FFS) insurance in the United States. HMO enrollment has grown from under 3 million in 1970 (InterStudy [1986]) to over 46 million by early 1995 (InterStudy [1995]). Little is known about how these changes in health care financing will ultimately affect physicians' incomes, but managed care is undoubtedly altering the economic environment of medical practice. The shift from FFS to salaried or capitated payment reduces physicians' incentives to overtreat.(1) Further, managed care plans control physicians' access to their enrollees by monitoring practice patterns and removing overly aggressive doctors from their panels. HMOs also employ a different physician mix (with fewer specialists) than the mix that characterizes the FFS environment. Thus, a hypothesized consequence of rising HMO market share is reduced demand for specialists. Wennberg et al. [1993] estimate potential surpluses ranging from 10% for emergency medicine to 210% in pathology. Surpluses of these magnitudes would be expected to reduce earnings. However, until recently, physicians have enjoyed stable or rising incomes (Simon and Born [1996]). This may be explained by asymmetric information between patients and physicians: if patients are poorly informed about the effectiveness of treatment options, doctors may be able to protect their incomes from the loss of patients to managed care by prescribing more aggressive treatment to their remaining FFS patients. Despite mixed evidence on the extent of supplier-induced demand (SID) (e.g., Fuchs [1978], Newhouse et al. [1982], Dranove and Wehner [1994], Rizzo and Blumenthal [1996]), this hypothesis remains popular among policymakers: The proponents of quotas for the size and mix of the health workforce argue that the supply side of the health sector is simply impervious to signals from the demand side... [I]t is widely believed that ... physicians enjoy almost total discretion in dictating the volume and composition of health care they render ... allow[ing] physicians to extract very high "target incomes" virtually regardless of the local physician-to-population ratio. (Reinhardt [1994]) Interest in physician incomes arises in part from the central role that incomes play in sending appropriate signals about changing supply and demand conditions. If FFS physicians can maintain their incomes as the FFS patient pool shrinks, decisions about specialty, location, and HMOs' staffing patterns would have little reason to change. Alternatively, if FFS incomes are sensitive to managed care penetration, we would expect doctors to increasingly practice in areas and specialties in which employment opportunities have become relatively favorable, pursue nonclinical positions, or retire. Likewise, HMOs would reduce substitution towards non-physician providers and away from specialist physicians. The consensus among health workforce experts is that the U.S. has too many physicians and too many specialists relative to primary care physicians and that market adjustments will be insufficient to restructure the physician supply. Thus, many health workforce experts and medical organizations have called for centralized workforce planning (e.g., Mitka [1997]), Committee on the U.S. Physician Supply [1996], Pew [1995], Cohen and Todd [1994], Schroeder [1994], Wennberg et al. [1993]). Proposals include limits on the number and specialty composition of residency positions, restrictions on medical school class sizes and immigration by international medical graduates, and incentive payments for early retirement, retraining, or diversion of physicians into non-clinical positions. Before advocating interventions in the medical labor market, it is worth exploring the potential for market forces to generate the desired physician supply changes. Many supporters of workforce policies presume that the failures of a FFS-dominated physician services market would persist even in a radically different context. …