The Productivity of Physician Specialization: Evidence from the Medicare Program

There is increasing concern in the United States with the growth of health-care expenditures. The rapid rise in expenditures is particularly troubling given that different areas seem to produce the same amount of health care at very different costs. In fact, a large body of literature documents both wide variation across the country in the quality and quantity of health care produced and the complete absence of a positive relationship between expenditures and the quality of care (John Wennberg and Meagan Cooper, 1996; Jonathan Skinner et al., 2001; Wennberg et al., 2002; Elliott Fisher et al., 2003a, b; Baicker and Chandra, 2004). Understanding the factors that drive these differences in use of inputs and productivity in health care is fundamental to designing efficient health-care policy. Potential efficiency gains are particularly important in the context of the aging U.S. population and the Medicare program’s mounting fiscal crisis. Many different inputs contribute to the production of health care, including medical personnel, technology, and patient characteristics. One dimension in which the production of health care in different parts of the country varies widely is the use of physician “specialists” (e.g., cardiologists, gastroenterologists)— those doctors who are not pediatricians or general practitioners. For example, the hospitals serving the population around Louisville, Kentucky, have 30 percent more medical specialists per capita than those serving Lexington, Kentucky, but 5.5 percent fewer family practitioners per capita—even though the cities have similar geography and demographics and each has a teaching hospital. These differences are driven by supply and demand factors in the market both for specialists and for health care more generally. Gary Becker and Kevin Murphy (1992) develop a general model of specialization which suggests that the degree of specialization in a market should be driven by an equalization of the positive marginal return to specialized knowledge and the growing marginal cost of coordinating specialists. This model has testable predictions: all else equal, areas with the advantage of low costs of coordination (such as dense cities) should have a higher degree of specialization, produce more health care, and consequently, exhibit better health. There are a number of factors that may interfere with the socially efficient use of specialization in the production of health care. Medicare, a major purchaser of health services, reimburses physicians using administrative pricing that is often criticized for being out of line with market valuation of the services they provide. More directly, several federal policies aim to increase the fraction of medical students going into primary care, including the specialty of internal medicine: the Council on Graduate Medical Education (2002) has guidelines on the number and distribution of residencies by specialty, and the federal government subsidizes areas with a “shortage” of primary-care physicians through Medicare and the National Health Service Corps. These policies may introduce distortions that increase the number of specialists. Furthermore, each individual specialist may not take into account the externality that coordination failure imposes: by adding congestion to the provision of health care, each specialist may compromise the quality of care provided by other physicians, a negative spillover that may also lead to too much specialization. By contrast, if a social planner were making a decision * Baicker and Chandra: Department of Economics, Dartmouth College, Hanover, NH 03755, Dartmouth Medical School, and National Bureau of Economic Research (e-mail: kbaicker@dartmouth.edu and achandra@ dartmouth.edu, respectively). This research was funded by NIA grant P01 AG19783-02. We are grateful to Elliott Fisher, Jonathan Skinner, Douglas Staiger, and John Wennberg for helpful comments and to Dan Gottlieb for data support.