Medical training return on investment

Some fun (but not new) light reading for those debating whether pursuing medicine was a mistake: UC Berkeley’s Nicholas Roth’s The Costs and Returns to Medical Education.

Overall, of the specialties included, rad onc and radiology topped the scale and endocrinologists bottomed it. The data is from 2009, so some of the assumptions are out of date (as well as pre-dating the imaging reimbursement crunch and subsequent fall in radiology reimbursement, for one). In particular, how student loans are handled makes the data presented significantly less terrible than the reality for some specialties. But it’s still worth reading for several reasons, including:

After Congress passed the 1997 Balanced Budget Act, which capped government payments to hospitals for residents, hospitals added over 4,000 more residents than the government would support. This suggests that market forces are at work as hospitals try to hire residents until the marginal value of an additional resident is zero. It also suggests that hospitals profit from additional residents long after the point when our government stops funding resident education.

I didn’t know that, but it jives perfectly with the narrative all residents believe that hospitals benefit from our cheap labor despite the ludicrous claims that it “costs more” to educate a trainee.

Back to the numbers though, and ultimately, the provided calculated rates of return for the investment in medical school and training is fraught with misleading specificity. Career duration can change the entire calculus (he uses a retirement age of 65). From chron:

Although the overall physician population has grown 188 percent between 1970 and 2008, according to the AMA, the physician population over age 65 has grown by 408 percent in the same period. Economic factors may be keeping many physicians on the job longer, according to data from The Doctors Company, a medical malpractice insurance firm. The company found that the portion of physicians reporting satisfaction with retirement plans has dropped 18 percent since 2006, and the average age at which an internist retired had increased from 62 in 2002 to 70 in 2009.

When considering the costs of becoming a doctor, one must add up the real costs of attending school, lost wages during school, decreased wages during residency, and interest on student loans. Roth uses $36,369.68 as the annual tuition and fees (now it’s probably closer to $47,500 according to the AAMC). He does not count for living expenses, which is fair since everyone’s got to live, but students usually borrow this cost and his treatment of loans is suboptimal. He uses the wages of an intern to approximate lost wages during school (which is probably low for what most doctors could earn in other fields). He uses the average wage of a same-aged person with a college degree to calculate the opportunity cost of not working during school (again, probably low, given that physicians are typically better than average students and likely destined for better than average nonmedical careers overall as well). He also gives us free money:

In 2011, approximately 88.8% of professional degree students received some sort of aid. Of those students, the average aid awarded amounted to $27,500. xxix When weighted, the total aid for all students on average amounts to $24,420 annually.

I know almost no medical students who receive aid anything like that unless we’re grouping student loan “aid” in here. While there are the occasional folks with full rides, most scholarships are small, and most aid given for professional students is actually in non-medicine fields. This probably shouldn’t have made it into the analysis.

I also consider interest payments on student loans. Creditors offer many different types of loans to students, and this makes it very difficult to infer a general loan payment structure. For my purposes, I assume that a typical student accrues $100,000 in interest payments from loans for medical school. I assume that this student pays $5,000 in interest payments annually during the first three years out of medical school and $12,140 annually for an additional seven years.

These sums do not include payments on the original principle; they only include interest payments. These assumptions are similar to a sample repayment schedule presented by AAMC. This repayment schedule assumes an initial Federal Stafford loan of $160,000 dollars with public service loan forgiveness with an assumed $100,000 starting salary after residency

Essentially all loans are DIRECT loans now, but it’s still impossible to handle all loan possibilities with one plan. But this assumes basically a three-year residency followed by PSLF. Given that 44% of graduating students are considering PSLF, assuming that the average doctor isn’t really on the hook for their student loans is misleading. The total loan amount is also now too low, as are the likely annual payments as an attending.

So that’s the dealbreaker. Student loans have changed a lot since interest rates have risen. He assumes no interest payments followed by 100% PSLF adoption, which severely underestimates the cost of attendance to basically 100k even. That’s not realistic for the 60% of doctors who don’t plan to attempt PSLF and would even less useful if PSLF is eventually capped as has been proposed.

It would have been nice to see the payback method used as well (the measure of time to break-even point on an initial investment (it’s intuitive and easier to understand for most folks). But using Net Present Value (NPV) is a great way to present the value of an investment in medical training. Unfortunately, the assumptions are everything: the initial investment cost and the discount rate change the game:

It would seem that the interest payments weigh heavily on the net present values of medical education investments, although these values remain substantively positive.

Specifically, these correlations suggest that physicians receive increases in earnings that overcompensate for the opportunity costs of additional training. This assumes, of course, that additional years of residency and fellowship training result in higher earnings than lesser-trained physicians. The correlation between median earnings and the years of training necessary for the specialties I analyzed, however, is only .4588. While this correlation is significant, it reveals some inconsistencies between further training and earnings. If further training does not result in increased earnings to justify that training, then some physicians may find it profitable to avoid specialization.

Case in point: Infectious disease and endocrinology. You lose three years of attending income only to make less than if you hadn’t specialized in the first place. You are effectively taxed against your academic and clinical interests.

As Roth notes, the assumptions used and the relative costs etc change the number. But in the past several years, the only trend has been more cost to training at overall higher interest rates than were available in the 2000s. This change only exacerbates the cost of choosing a specialty with a bigger duration-to-income ratio.

It’s nice to see a mathematical illustration of what everyone implicitly knows. While Roth’s investment outlook is sunnier than reality, the comparison between different specialties is still relatively meaningful.

The average doctor with average debt is still doing okay. But a doctor choosing a less than average remunerative field with greater than average levels of debt is a different story. That private college + private medical school graduate passionate about rheumatology better be planning on starting their career in academia and hoping PSLF stays just the way it is. The orthopod? They’re just fine.

And if medical schools continue to get more expensive and options for forgiveness are capped, we’re not that far off from the point when some fields will no longer make financial sense at all.

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