Tuesday, March 2, 2010

How much money do doctors make?

It has been a medical phase for me recently, as some friends of Brick and Rope have pointed out. Indulge me with one last post and I promise I will move on.

I wrote a post some days back with
some anecdotes about health care in the USA. Readers Pankaj Kakkad and Random Worker made some very thoughtful comments on the post. One of their key thoughts was that structurally limited supply of doctors in the US has led (as it must) to an increase in physician pay, which gets passed on to patients and insurance companies, and is one of the drivers of high cost of medical care.

This got me thinking - just how much money do doctors make? And - taking a complete detour from the original 'cost of health-care' conversation - is the pay worth all the years of work, the hundreds of thousands of dollars in education costs and incredibly tough working hours? In a nutshell, does it pay to be a doctor?

I researched this a little bit and at least one part of the answer was somewhat surprising to me. First up, how much do doctors make? Needless to say, a question like this is too simplistic. What kind of doctor? Urban or rural? Independent or in a hospital? Before expenses or after? And on and on. Those are important questions. But let us try and abstract away from all those wrinkles for a minute, and look at the high level story. Just how much does an 'average' doctor in the US make every year?

I found a great
study of physician incomes in America. The study was done by James Reschovsky and Andrea Staiti. The way this study was constructed, the researchers were looking primarily at differences between incomes of urban and rural area doctors. Here is what they found:

On an average, urban doctors make $218,000 a year and rural ones $204,000. Now, this information is somewhat dated (2003). But that gives us a pretty good starting point. Also remember that this is the average of all physicians (or, more precisely, I guess all physicians who were willing to share information). Primary Care Physicians were probably below the average and specialists much above this average.

The next question I wondered about is: How much does it cost to become a doctor? And what does the payoff look like in the long run, given this initial investment, and the subsequent income?

On this one, there is another great research paper out there that seems to be the source for most subsequent look in this area. This research is even more dated (1994), but has some high quality information.
This research, by William Weeks in the New England Journal of Medicine, compares education costs and future income of Physicians with three other types of professionals - Dentists, Attorneys and Business people (I guess that means MBAs).

To calculate the education costs, Weeks looks at both direct costs of education and opportunity cost (money they could be making if they weren't studying). Again, averaging out over a broad range, here is what he finds in terms of direct costs for medical education as compared to other professions.

Remember again that the numbers are about 15 years old ... use caution when looking at the base levels. On a relative basis though, it seems clear that medical education is significantly more expensive than either law or business education.

Now, does this higher education cost pay off in terms of subsequent income?

To calculate this, Weeks takes the direct cost, adds opportunity cost, and then looks at income (including income growth) over the working life of the different professionals. In doing so, he also incorporates things like the length of education being different for different disciples. He then looks at the Internal Rate of Return each of these kinds of professionals gets to their original investment. Here are the results -

Over the working lifetime, MBAs get the highest IRR on initial educational investment. At about 30% p.a., the IRR is pretty darn impressive. Law is not far behind. Medicine, which starts with a much higher base of expenses (both because it is expensive per year, and also because it lasts longer and hence costs more opportunity cost) comes in near the bottom of this category of highly paid professionals, with an IRR of between 15% and 20%, depending on whether it is primary care of speciality. Nothing to be scoffed at, but certainly not top of the pile.

So what do I learn from all this? Medical schools are expensive. They take a long time to get through. They entail tough working conditions. And the return isn't nearly as dramatic as you would imagine. Wow! It's tough, wearing that white coat.


  1. But, I understand that the reward of saving a life is incomparable to anything that an MBA will get in most jobs. Most dedicated doctors choose that profession more because of the thrill of the trade, rather than the return.

    1. Doctors in the USA are overpaid. Without the enormous number of forgine doctors the healthcare system in the USA would fall apart.

  2. I don't think that IRR is the appropriate metric here, given that this investment is not scalable. NPV would make more sense and I guess doctors would fare the best on that.

    For example, a non-college educated WalMart worker may have the highest IRR given his initial investment is close to 0

  3. @ Anon: Yes, that is surely true for at least some of the doctors. I don't mean to make everyone sound mercenary. That said, when a student takes up medicine at 20 yrs of age, I am not sure how many think of saving lives as a motivation.

    @ Ravi: Good point. The research paper I linked to does have the NPV number as well. But there are multiple other assumptions on NPV like discount rate, hour adjustment etc which make things a bit complex to explain. So I showed the simpler IRR numbers. Anyway, result - with a 7.5% discount rate, speciality doctors have a 40% higher NPV than MBAs, and primary care doctors have about 40% lower.

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  5. Hi! I loved this post, so practical and informative. I had no idea they earned so much. I also don't make a lot of money - I own a business, but it's still a new thing, so it doesn't even bring me money yet.
    I'll be coming back for sure!