https://www.washingtonpost.com/business/2023/08/11/doctor-pay-geography/
Why are the highest-paid U.S. doctors in the Dakotas?
The best-paid doctors in America work in the Dakotas, where they averaged $524,000 (South) and $468,000 (North) in 2017 in their prime earning years, including business income and capital gains. That’s well above the already astonishing $405,000 the average U.S. doctor made in the prime earning years, defined here as 40 to 55.
And it’s way above the $288,000 we estimate was earned by lawyers in that age group. Prime-earning-age attorneys in South Dakota made $165,000 in 2017, while their neighbors to the north made $183,000.
By contrast, lawyers in New York earned an average of $438,000, which is roughly comparable to the $447,000 earned by the average New York doctor. Their D.C. lawyer friends made $406,000, while the average D.C. doctor eked out just $349,000. This makes our nation’s capital one of only two places in the nation where lawyers out-earn doctors. (The other is Delaware, our nation’s corporate capital.)
Overall, the average U.S. lawyer can expect about $7.1 million in lifetime income, a bit higher than a primary-care doctor ($6.5 million) but well behind the broader physician average of $10 million, according to a sophisticated analysis of about 2 million tax records from lawyers and more than 10 million tax records from doctors.
That analysis appears in a recent working paper by economists Maria Polyakova of Stanford University, Joshua Gottlieb of the University of Chicago, Kevin Rinz and Victoria Udalova of the Census Bureau and Hugh Shiplett of the University of New Brunswick. The project is one of the first major results from a health-data-focused Census Bureau effort to link sprawling government data sets (while, of course, following stringent standards regarding confidentiality and privacy).
The more-limited lawyer data doesn’t allow for the same in-depth analysis we did for doctors: It includes far fewer records, and the definitions aren’t as clean. For example, while attorneys predominate, we aren’t able to sort out judges, magistrates, clerks and other judicial workers.
But it does offer a useful tool for highlighting the supremely weird geographic distribution of physician income, which defies expectations across the board.
Rural regions rule the doctor rankings: Alaska, Wyoming and Nebraska join the Dakotas in the top five states for physician pay, confounding the intuition hammered into our souls by more than a decade of covering economics. None of those are high-earning states overall, with the evergreen exception of Alaska. They’re also not high-cost: North and South Dakota rank 41st and 45th, respectively, in cost of living among the states and D.C.; only Alaska costs more than average, according to the Bureau of Economic Analysis.
They’re also exactly the sort of rural areas where you’d expect to find lower-paid primary care doctors, not high-earning specialists. But the economists found that, after accounting for training and experience, doctors of all stripes in low-income areas out-earn their peers in high-income ones.
That’s, uh, unusual. If it happened with other careers, low-income areas would — by definition — no longer be low-income areas!
“For lawyers, there is a strong relationship between the lawyer’s income and incomes of other people in the area. And that’s not true for doctors,” Gottlieb said, noting that doctor pay doesn’t have a strong relationship with local education levels and real estate prices, either.
So why is the geography of doctor pay so mind-blowingly inside-out?
We went to the phones. And, at first, most economists we called gave the same answer: competition.
Rural America has about 20 percent of the U.S. population but about 10 percent of its doctors, according to our analysis of Census Bureau data. So the talented young physicians willing to hang their shingles in North Dakota don’t have to worry about rivals undercutting their prices. They can charge more for everything, from appendectomies to vasectomies.
Competition could also show up in disguise: You may have to pay doctors more to lure them away from the big cities. Say what you will about big skies and fresh air; many educated young professionals making $405,000 a year can find more fun ways to spend that money in New York’s Manhattan than in Manhattan, Kan.
Not all doctors think that way, of course. And anyway, Gottlieb said, the normal laws of economics don’t always apply in health care, “a fascinating labor market where the government is playing a huge role.”
Take the country’s lopsided system of medical residencies. Residencies tend to be in well-established urban areas, in part because federal residency funding was essentially frozen in 1997 and ignores a quarter-century of population growth. Also because elite medical colleges stubbornly insist on staying put in the Northeast, and because it takes a hefty population to produce enough patients to provide the variety of ailments needed to fuel a teaching hospital.
The distribution of residencies helps determine the distribution of doctors, since most residents (54 percent) stay in-state for their careers, according to the Association of American Medical Colleges. So the lack of rural residencies has accelerated the rural doctor shortage.
The government also influences physician pay directly through Medicare, perhaps the biggest spigot of health-care cash on Planet Earth. Typically, people in low-income areas can’t spend as much and merchants tend to earn less. But that’s not the case for health care, in large part because Medicare ensures that retirement-age Americans — by far the biggest health-care consumers — can afford about as much in South Dakota as they can in South Beach. Which means doctors work in one of the few industries where demand is not necessarily determined by disposable income.
“Consumers’ purchasing power depends on their incomes. But here we break that link by providing subsidies specifically for purchasing medical care,” Gottlieb told us.
But Medicare plays an even more explicit role in fostering this geographic pay-gap anomaly. A stellar 2022 report from the nonpartisan Government Accountability Office lays out the astonishing design choices that have caused Medicare calculations for doctor pay to be remarkably flat from state to state.
Doctor pay is one of three elements (along with the costs of running a practice and of malpractice insurance) the Centers for Medicare and Medicaid Services use to calculate how much Medicare should reimburse in a given area. To calculate local doctor pay, CMS takes careful Bureau of Labor Statistics measurements of how much other local professionals earn and compares them with the national average for those professions.
Then — and you are not hallucinating here — CMS takes that carefully derived number and divides it by an arbitrary factor of four.
So if architects, engineers, computer scientists and attorneys earned 20 percent less than the national average in Idaho, then the government would take that 20 percent, divide it by four and set the physician-compensation component of their reimbursement formula at 5 percent less than the national average. Which helps explain why doctors in Boise might do pretty well for themselves compared with their neighbors at the local law firm.
Why does CMS do this? Because when the system was introduced in 1989, policymakers were troubled by the idea of large variations in doctor pay, according to a 2004 Urban Institute report. The normal economic calculations, they concluded, produced a “degree of geographic variation in physician work costs [that] appeared to be too large.”
And that arbitrary bit of division isn’t the end of it. In many years — including the current one, as well as the years we used for pay data — Congress has taken all the places with below-average adjustments and boosted them up to the national average. So instead of making 5 percent less, the Idaho doctors in our example should make zero percent less. (The Affordable Care Act made this zero-percent minimum permanent in the most rural states, which include the Dakotas. Alaska gets a special minimum of 50 percent above average.)
Doctors in high-paying states see the same adjustment in reverse. If local professionals make 20 percent more, the doctor-pay formula component would be just 5 percent higher. The goal of this exercise seems to be attracting physicians to rural areas. But the effect is that mighty Medicare expects physicians in Bismarck to earn nearly as much as their peers in Boston.
“Medicare adjustment rates certainly affect geographic patterns” in doctor earnings, Polyakova said. And if those adjustments were more closely related to local prices or median incomes, then geographic differences in physician incomes would look more like those of lawyers.
“If the reality is that you do have to pay a physician more to work in Rapid City or somewhere in Idaho, we still want Medicare patients in those markets to receive high-quality care,” said Christopher Whaley, a health care economist at the Rand Corp. and Brown University who has analyzed the factors influencing physician pay.
“And maybe that’s just the reality of operating a nationwide health-care system,” Whaley said: “In some areas, you have to pay more.”
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