The Strange Case of the Negative Resident Wage
- Presenter:
Chair: Joel Hay; Discussant: TBA Mon June 5, 2006 13:45-15:15 Room 121
Authors: Jerry Cromwell (jcromwell@rti.org) and Ed Drozd (edrozd@rti.org), Research Triangle Institute (RTI)
Title: The Strange Case of the Negative Resident Wage
Rationale: Economic theory rarely encounters an input with a negative wage, or supply price. Theory also consistently rejects the notion of a “Giffin” input exhibiting an income effect wherein an employer seeks to buy more of the input when its price rises. Medical residents hired by non-profit teaching hospitals may exhibit both of these strange features.
Objectives: The paper derives estimates of the marginal subsidized wage, or shadow price, of residents in teaching hospitals at differing levels of Medicare financial dependence. The goals are (a) to quantify the degree to which residents are a “line-of-business” for hospitals, (b) to explore the role of Medicare payment factors in generating negative resident wage rates, and (c) to explain the continued growth in residents in the face of Congressional constraints on Medicare Direct and Indirect Medical Education (DME & IME = total GME) payments.
Methodology: Teaching hospital utility functions are maximized with respect to community services and size of teaching programs subject to revenue, cost, and patient care production functions. First-order conditions produce resident demand curves dependent on stipends that are offset by marginal Medicare DME and IME subsidies as well as preferences for higher patient volumes. Adjusted resident shadow prices are simulated by varying key Medicare payment and hospital demand parameters. Next, subsidies are calculated for roughly 1,000 teaching hospitals for 2001 and financial “bite” estimates quantified as a result of the 1997 Balanced Budget Act (BBA). Descriptive statistics and OLS regressions show trends in resident growth post-BBA, financial impacts of GME rollbacks, size distributions of subsidies, and the ultimate effective marginal resident wages by hospital characteristic.
Results: Post-BBA, 1996-2001, FTE resident counts in teaching hospitals increased roughly 7,000, or 9%, despite a 17-20% reduction in expected resident subsidies. Teaching hospitals easily absorbed such reductions that were only 0.5% of total revenues. Simulations indicated negative marginal effective wages for over 90% of teaching hospitals in 2001, encouraging further resident hires. With Medicare subsidies alone, resident shadow wages averaged -$57,000, implying that Medicare payments, at the margin, more than doubled the entire resident stipend (about $40,000). Econometric results showed a direct relationship between Medicare bite and resident growth, with hospitals facing negative marginal wage rates continuing to increase demand holding bite constant.
Conclusions: While the federal government has enacted wage subsidies for selected adults in the past, none compare with the enormous subsidies afforded residents in teaching hospitals. Congressional attempts to rein in resident growth through “soft” payment caps proved futile; persistent negative resident shadow prices remain for many hospitals. Extremely low relative wages, coupled with high resident patient care productivity, guarantees continued training slots for all U.S. medical graduates, large influxes of foreign graduates, and teaching hospital overpayments.
