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Background Efforts at physician-payment reform in the United States have focused largely on the relative incomes of primary care physicians and specialists, who more often have procedure-based practices. Comparisons of the incomes of physicians and other professional groups have received less attention.
Methods We used standard financial techniques to determine the return on educational investment over a working lifetime for five groups of professionals: primary care physicians, specialist physicians, dentists, attorneys, and graduates of business schools.
Results In current dollars, the difference in the average future hourly income between a given professional and a high-school graduate of the same age, after educational expenses are subtracted (average hours-adjusted net present value of the educational investment) was greatest for specialist physicians and attorneys; dentists and businesspeople had intermediate values; and primary care physicians had the lowest value. The annual yield on the educational investment over a working life (hours-adjusted internal rate of return) was 15.9 percent for primary care physicians, as compared with 29.0 percent for businesspeople, 25.4 percent for attorneys, 20.9 percent for specialist physicians, and 20.7 percent for dentists. A sensitivity analysis showed that primary care physicians did less well in terms of the return on investment than the other groups even when we varied the assumptions in our model widely and that specialist physicians did less well than attorneys working in law firms and dental specialists.
Conclusions Students can expect a poorer financial return on their educational investment when they choose a career in primary care medicine than when they choose a procedure-based medical or surgical specialty, business, the law, or dentistry.
Society might use a number of objective standards to evaluate the appropriateness of physicians' income in the United States: historical comparisons, comparisons with physicians' incomes in other countries, or comparisons with the incomes of other professionals8. Using the last method, we evaluated the return on educational investment for people in business, the law, dentistry, and medicine. Within medicine, primary care and procedure-based specialties were considered separately.
Methods
Overview
We used standard financial-analysis techniques to compare the return on educational investment for various professions. To a large extent, options for graduate school, and thus career options, are determined by academic performance at the college level (measured by grade-point averages and standardized test scores). Different professional schools require different standardized tests for applicants, the scores of which are not interchangeable. Therefore, we examined the 1991 mean enrollment-weighted college grade-point averages for graduate-school entrants in several professions in order to identify the groups for which we would gather and compare data on income.
The grade point is a scale from 0 to 4, on which 4 equals a grade of A, or "excellent." We sought comparison groups with a mean grade-point average that closely approximated that of 1991 medical school entrants (3.42)9,10. To identify a comparison group for business schools, we examined the mean grade-point average (3.37) of students entering the top 20 graduate schools of business, as listed by Business Week magazine11,12. The mean grade-point average for law schools approved by the American Bar Association is 3.27; that of the most competitive 50 percent of law schools is 3.4313. The mean grade-point average for dental schools approved by the American Dental Association is 3.02; the average for the most competitive 10 percent is 3.4110. Limitations on the available data prevented us from examining the incomes of law and dental students from the top schools only; therefore, we used data for all dentists and attorneys in our analysis.
Measures of Return on Investment
We examined two measures of the return on educational investment that could be expected by a high-school graduate (age, 18 years) who was choosing among five professional careers (law, business, dentistry, primary care medicine, and procedure-based specialty medicine). We used an established method of adjusting for differences in the average number of hours worked in each profession14. The net present value of the educational investment, adjusted for the average number of hours worked, is the current value of the difference in the future hourly wage between that of a high-school graduate and that of a given professional, after all educational expenses are subtracted (hours-adjusted net present value). The internal rate of return is the annual yield on the educational investment over a working lifetime, expressed as a percentage and adjusted for the average number of hours worked (hours-adjusted internal rate of return).
We assumed a fixed working lifetime, from high-school graduation to 65 years of age. Although some people may choose to work longer, the income contribution of the additional years is trivial in our method of analysis. We assumed that students completed their four-year undergraduate education and graduate education (of variable length) without interruption and were employed during the summers not spent in school. All graduates of professional schools were assumed to be employed in their profession. We also assumed that inflation had an equal effect on income, tuition, the cost of the debt incurred in financing education, and purchasing power; therefore, we did not attempt to account for future inflation in our model. All data on cost and income are expressed in 1990 dollars.
Definitions and Sources of Data
Direct Costs
Direct educational costs comprise tuition, fees, educational supplies, and room and board. We assumed that students entered higher education free of debt and without savings, so that all educational costs needed to be earned or borrowed. All summer earnings were assumed to be used to offset educational costs, and remaining expenses were assumed to be covered by nondeductible student loans (at 8 percent interest with a 15-year term, with repayment beginning the year after graduation). Although some students may not have had to borrow, this method reflects the opportunity costs of depleting existing resources. All groups were assumed to have an undergraduate tuition of $3,760 per year (the enrollment-weighted median tuition cost at all U.S. undergraduate institutions in 199015) and $9,108 per year for nontuition expenses in undergraduate and graduate school (as budgeted in 1990 by the Guaranteed Student Loan Program, a government program subsidizing student loans, in its assessment of the financial needs of unmarried men). Table 1 summarizes total tuition,11,16,17,18 expenses, and annual loan repayment according to the degree obtained -- that is, the direct costs of professional education.
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The opportunity cost is the income a person could have generated had he or she not pursued higher education. Thus, the opportunity cost was defined as the income of a high-school graduate employed full-time. We obtained the median pretax income of high-school graduates from the Bureau of the Census19. Opportunity costs were considered to be the same for all professions and all ages.
Income and Hours
Using Becker's method,20 we assumed that the summer earnings of undergraduate and graduate students in all groups were one quarter of the annual income of high-school graduates of similar age if the educational schedule allowed summer employment (it does not for second-year and third-year medical and dental students). We also assumed that preprofessional students spent as many hours in education and summer employment as high-school graduates spent in full-time employment21.
Incomes for people in business were calculated from data on starting incomes for graduates of the top 20 business schools -- the target comparison group12. The average age-adjustment factor in the other professions was then used to calculate these incomes over a working lifetime. This method produced a conservative estimate of income for this group, which peaked at an annual salary of $115,700 at 45 years of age. The average number of hours worked by business-school graduates was derived from the appropriate quintile for income in the 1992 Green Book of the House Ways and Means Committee21.
For attorneys, the only available age-specific data on income and hours were for those in law firms. Before 40 years of age, 60.9 percent of nonfederal attorneys in private practice work in law firms (i.e., firms with more than two partners); after they reach 40 years of age the comparable figure is 47.3 percent22. The 1991 Survey of Law Firm Economics23 provides data on total compensation and billable hours, after practice expenses are deducted, for attorneys not employed by the federal government who work in law firms. The actual number of hours worked by attorneys was estimated at 110 percent of the median number of billable hours, thus allowing for the additional time needed to administer the firm23. We assumed that after lawyers had been associated with a firm for five years, they became partners. We obtained age-specific data on cash compensation for nonsupervisory attorneys not working in law firms from Langer24. These data were combined with the data on attorneys in law firms to produce a weighted median income for all attorneys. We used data on the number of hours worked from the law-firm study for all attorneys, since similar data for attorneys not in law firms were not available.
The median age-specific incomes and the number of hours spent in patient care for dentists not employed by the federal government were obtained from the 1991 Survey of Dental Practice of the American Dental Association25.
For physicians, we used the minimal postgraduate training periods required for board certification and assumed that residencies were completed without interruption. Median incomes of resident physicians were obtained from Evans26; median incomes and the number of hours spent in patient care, after expenses, by physicians not employed by the federal government were obtained from Gonzalez27. We conservatively assumed that residents worked the same number of hours as attending physicians in the same specialty. We defined primary care medicine to include general or family practice, general internal medicine, and pediatrics. We defined procedure-based specialty medicine to include surgery, obstetrics and gynecology, radiology, anesthesiology, and the subspecialties of internal medicine.
The age-specific data on income and the number of hours spent in patient care were compiled according to specialty, with data on subspecialists combined. Although we were unable to find age-specific data on income and hours for general internists and medical subspecialists, we calculated conversion factors for incomes (0.9 for generalists and 1.3 for specialists) and hours worked (0.995 for generalists and 1.005 for specialists) from data compiled by the American Medical Association28 and applied these to the age-specific data on all internists combined to obtain age-specific estimates for generalists and specialists within internal medicine. No comparable information on pediatric subspecialists was available; therefore, we included all pediatricians, including subspecialists, in the primary care group. Because of their small number, the inclusion of pediatric specialists is likely to increase only slightly the income of primary care physicians. To estimate the income and hours worked for primary care physicians and specialists, we weighted the data for each specialty according to the number of physicians currently in practice29.
Table 2 summarizes the costs, income, and number of hours worked annually according to age and profession. Greater detail is provided for the beginning of a professional's career to demonstrate the effect of the length of education and educational costs on the time required to begin to make money.
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Our results are dependent on both the assumptions we made and the accuracy of the available data. We performed a sensitivity analysis to examine the effect of varying disputable aspects of the analysis within a plausible range of possibilities (Table 3). Aggregate data for incomes in business beyond the first year after graduation from business school are not available; therefore, we assumed that subsequent income growth would parallel the average growth rate for the other professions. We reexamined the data using 80 percent and 120 percent of our initial estimate of income for businesspeople.
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The data on hours spent in patient care by dentists indicated a relatively short work week (assuming four weeks of annual vacation and 33.6 hours per week in direct patient care). Therefore, we estimated a lower limit for the internal rate of return on investment by including all the hours spent in professional activities (38.2 hours per week). Our upper estimate for dentistry was based on data on income and hours worked for dental specialists.
Finally, for physicians, we considered the effect of including all the hours spent in professional activities (about 59 hours per week for both primary care and specialist physicians) in the analysis, instead of including only hours spent in patient care (about 54 hours per week).
Results
Figure 1 shows the average hours-adjusted net present value of the educational investment for the different professional groups. For comparative purposes, the educational investment of a high-school graduate would have a net present value -- by definition -- of $0.00 at all discount rates, since there would be no further investment in education. Thus, this figure represents the current value of the future hourly wage, above and beyond that of a high-school graduate, after all educational expenses are subtracted. Physicians in procedure-based specialties and attorneys have considerably higher returns on their investment over a working lifetime than dentists and businesspeople; the return for primary care physicians is much less than for all other groups.
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Discussion
Using conventional accounting techniques, we determined the financial return a high-school graduate could expect on his or her educational investment in professional training in several fields. The results of this analysis confirm a widely held belief that an investment in professional education leads to substantial financial rewards.
Although all the professions we studied are well rewarded, the relative income of the groups varied with the measure we used. Attorneys and those in business had the highest internal rate of return on their investment, whereas attorneys and specialist physicians had the highest net present value of their investment. Primary care physicians had the poorest financial results of the five groups studied. This finding did not change even when a sensitivity analysis was performed to examine the effect of varying key aspects of the analysis.
The difference in the relative standing of the groups, depending on the measure, has a simple explanation. Internal rates of return are sensitive to early earnings. Thus, the relatively brief period of training and the earlier increase in income for attorneys and those in business account for their high rate of return. The second measure -- net present value -- is more sensitive to absolute income levels over the course of a career. An earlier investigation14 found that attorneys had a considerably lower internal rate of return than physicians. This 1985 study, however, was based on data through 1980. The results were influenced in large measure by the assumption that the income of the average attorney was only 40 percent that of the average physician.
There are several limitations to our approach. First, our results are dependent on the data available. The relative financial performance of specialist physicians, for example, varies with the assumptions used in the model (Table 3). The sensitivity analysis demonstrated that primary care physicians have a relatively poor financial return on their investment when we used a wide range of assumptions. Second, the return on investment for each group is what could be expected by a student today, given current costs and incomes. To the extent that these data change over time, so will estimates of return. Nevertheless, we believe current data are the most relevant for students who are now considering professional careers. Third, the returns on investment are based on medians. Students who can more precisely define their future costs (for example, the tuition at a particular law school) and their future income (for example, that of physicians in a particular surgical subspecialty or people in a particular type of business) might project very different returns. Fourth, our analysis cannot account for any variation in the risk associated with particular careers. Unlike physicians, attorneys, and dentists, people in business are not given a license by society to provide a monopoly service. The greater risk associated with a career in business may, in part, justify a higher return.
Finally, our analysis ignores nonfinancial factors that play a part in the choice of profession. The return on educational investment is not the sole reason to choose one profession over another; other considerations, such as benefit to society, intellectual stimulation, and prestige, undoubtedly have a role in career decisions30. Policy makers would be remiss, however, if they ignored the powerful influence of the up-front costs of professional training and students' concern about their ability to repay their debts. The direct costs of education are very real to students, as are the opportunity costs of forgoing income that might be earned elsewhere. Many students may make an informal calculation of return based on near-term costs and their future ability to repay debts. Such a calculation strongly favors professions with brief training periods and high incomes.
These findings have important implications for physician-payment reform. The primary focus of the debate over reform has been on reducing the disparity in income between the primary care and procedure-based fields. Policy makers intend to use the market forces of the resource-based relative-value scale31 to "level the playing field" for generalists and specialists and thereby encourage more medical students to pursue careers in primary care. Our analysis confirms that such attention is warranted. There has been less focus, however, on the absolute return on investment for physicians as compared with other professionals. If the new income level for physicians is closer to the current level for primary care physicians than to the current level for specialists, our data suggest that competing market forces may encourage students to enter law, business, or dentistry instead.
There are few realistic ways to address these issues. It is unlikely that health care reform will shorten training for physicians or lower the incomes of other professions. Nevertheless, two courses are immediately available. First, in order to maintain a competitive return on investment for similar students, the "level playing field" for physicians could be established closer to the current income level of specialist physicians. Second, the enormous educational costs32 borne by medical students could be reduced.
Market forces are pervasive. Just as market forces might be used to encourage medical students to choose careers in primary care, the same forces might induce undergraduates to choose careers in other professions. The results of our analysis of income in different fields indicate that primary care physicians currently receive a lower return on their educational investment than specialist physicians or professionals in business, law, and dentistry. These returns and the incentives they create should be carefully examined as part of health care reform.
Dr. Welch is the recipient of a Department of Veterans Affairs Career Development Award in Health Services Research and Development.
Source Information
From the Veterans Affairs Medical Center, White River Junction, Vt. (W.B.W., A.E.W., H.G.W.), and the Department of Psychiatry (W.B.W., A.E.W.) and Center for the Evaluative Clinical Sciences (H.G.W.), Dartmouth Medical School, Hanover, N.H. Mr. Wallace is a self-employed accountant in West Linn, Oreg.
Address reprint requests to Dr. Weeks or Dr. Welch at the Veterans Affairs Outcomes Group, 111B, Veterans Affairs Medical Center, White River Junction, VT 05009.
References
Glossary
Cash flow per hour: The flow of money per hour to or from a person or firm. In this analysis, annual cash flow per hour (CF) is defined as the annual income after expenses (Y) minus annual educational expenses (E) and annual opportunity costs (O), divided by the annual number of hours worked (H), as defined in the following equation:
CF = (Y-E-O)/H.
Opportunity cost: The value of available alternatives that must be forgone in order to achieve a particular goal. In this analysis, the opportunity cost is the income that could be gained by starting work immediately after high school, is the same for all the professional groups.
Discount rate: The rate at which income is reduced in value for each year after high-school graduation. The discount rate reflects the greater value of a dollar received today, as compared with a dollar received in the future. The values differ because today's dollar can be invested to produce an immediate return. A discount rate of 5 percent, for example, means that a dollar received in one year is considered to be worth $0.95 and a dollar received in two years, $0.902. Because of its influence on net present value, the discount rate is varied in our analysis to reflect a range of reasonable possibilities.
Hours-adjusted net present value: The difference in the current value of the future hourly wage between a given professional and a high-school graduate of the same age, after all educational expenses are subtracted. It is calculated as the sum of the annual values for cash flow per hour (CF) over a number of periods (j, from 0 to the nth period), discounted at a particular rate of alternative investment (i), to the present period, as shown in the following equation:
NPV(CF) = (j=0)Sigma(n) CFj / (1 + i)j + 1,
where NPV denotes the net present value.
Cumulative hours-adjusted net present value: The sum of the net present values each year from the completion of high school to a specified age, adjusted for the number of hours worked in a year.
Average hours-adjusted net present value: The cumulative net present value, presented as an average over a working lifetime, adjusted for the number of hours worked in a year.
Hours-adjusted internal rate of return : A measure of the annual yield on an investment. It is defined as the annual interest rate (r) that equalizes the negative and positive cash flow (the flow of money to and from a person or firm) per hour (CF) on the educational investment over its duration by weighting them according to when they occur; j denotes the number of periods, from 0 to the nth period. It can be expressed by the following equation:
(j=0)Sigma(n) CFj / (1 + i)j + 1 = 0.
In our analysis, negative cash flows occur in earlier periods, positive cash flows occur later.
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Related Letters:
Return on Educational Investment
Kaplan R. B., Melsha R., Baumgarten R. K., Weeks W. B., Wallace A. E., Welch H. G.
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Full Text
N Engl J Med 1994;
331:747-748, Sep 15, 1994.
Correspondence
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