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The COVID-19 pandemic has the medical community scrambling to address critical shortages in supplies and personnel. Among the problems is that some communities now battling the virus had too few physicians even before patients began suffering from a virulent and highly contagious pathogen.

While it is not possible to boost the physician workforce rapidly in a crisis (it typically takes eights years of post-secondary schooling to get a medical degree), it is possible to adjust the processes now in place for educating, training, and licensing practicing physicians so that supply can adjust more naturally (and with less government involvement) to the changing needs and wishes of the patient population.

One critical issue for consumers is the high cost of care, including for services provided by doctors. Physicians charge much higher fees in the US than in other high-income countries. In 2019, US physicians earned an average income of $313,000, compared to $163,000 for their counterparts in Germany and $108,000 in France.

All other things being equal, one would expect markets with fewer physicians to have higher prices than those with more competing practitioners. A study from 2015 showed that pricing for many common physician procedures was 8–26 percent higher in markets with high levels of consolidation among physician groups compared to markets with more numerous and independent practices.

Given the high costs of medical care in the US, it is appropriate to consider whether current policies are unnecessarily restricting the number of physicians who are licensed and ready to care for patients.

Brief Historical Context

The current state-based system of medical licensure and medical school regulation can be traced to the organizational strength that mainstream physicians developed in the latter half of the 19th century. The American Medical Association (AMA) was formed in 1847 and immediately built a network of local affiliates that became powerful forces in state legislatures. Over the period 1875–1915, state governments approved more than 400 separate medical practice laws, with increasing emphasis on physician licensure, competency exams, and oversight of the schools issuing medical degrees.

In 1910, Abraham Flexner wrote a critical assessment of medical education in the US and Canada for the Carnegie Foundation. Specifically, he directed withering criticism at the for-profit schools that were prevalent at the time and recommded the closure of scores of existing institutions. His influential report left an enduring, threefold legacy: it established that academic medical training in the US should be tied directly to scientific inquiry and evidence; it placed academic medical centers at the pinnacle of US health care; and it laid the predicate for a medical school and residency credentialing system that controls physicians’ entry into medical practice.

Basic Licensing Framework

Candidates looking to become US physicians must commit themselves to navigating a multi-year and expensive educational and training process.

Although there are exceptions, the typical path starts with completion of a traditional, four-year college education followed by four years of medical school and at least three years of residency training.

To be admitted to a medical school, students must take a standardized test -- the Medical College Admission Test, or MCAT -- developed and administered by the trade association representing medical schools and academic health centers (the Association of American Medical Colleges, or AAMC).

Since 1942, the Liaison Committee on Medical Education (LCME) has established the criteria for accrediting the nation’s medical schools. The LCME is a joint enterprise of the AMA and the AAMC. Most states stipulate that conferring a medical license is predicated on graduation from an accredited institution. Further, graduation from an accredited school makes candidates eligible to take the standardized US Medical Licensing Exam, which is also a necessary step for licensure.

In the fourth year of medical school, students participate in an elaborately structured residency assignment program that matches interested students with available residency slots. The students specify their preferences, and an algorithm matches them with residency programs in a manner that is supposed to maximize overall student and residency program satisfaction.

Residency program accreditation began in 1972 with the establishment of the Liaison Committee for Graduate Medical Education, which transitioned into the American Council for Graduate Medical Education (ACGME) in 1981. In recent years, the ACGME and the American Osteopathic Association (AOA) have jointly accredited the residency programs for allopathic and osteopathic physicians. Most states require completion of residency training at an accredited institution before physicians are granted licenses that allow them to take care of patients without supervision.

Foreign-Born Physicians and International Medical Graduates

The US is heavily dependent on foreign-born physicians and medical education provided outside the US and Canada. Currently, 29 percent of US-based physicians are foreign-born, and 23 percent are graduates of schools outside the US and Canada (these physicians are referred to as international medical graduates, or IMGs). IMGs can be US citizens or legal residents, or foreign-born, non-US citizens. Many IMGs have attended schools in the Caribbean.

The typical pathway for non-US citizens to become practicing, US-based physicians is to attend medical school outside the US and Canada and then participate in a US-based residency program. The Educational Commission for Foreign Medical Graduates (ECFMG), an organization created by the medical and teaching hospital community, oversees the process of IMGs entering US-based residency training.

A major consideration for foreign-born IMGs is navigating US immigration law.  There are two main options.

Under the J-1 program, the ECFMG can sponsor candidates who would like to attend a US-based residency program with the stated intention of returning to their home countries for at least two years after finishing their clinical training. Upon fulfillment of their two-year commitment, they can then apply for an alternative visa status that might allow them to return to work in the US as practicing physicians. In some cases, the two-year requirement can be waived if a foreign-born IMG obtains a Conrad 30 waiver allowing  them to practice in an underserved US market rather than return to their home countries.

The H-1B visa program allows enployers to sponsor applicants with specialized employment skills. In general, applicants must enter a lottery for one of the available annual H-1B visas, which are capped by law. However, higher education institutions, nonprofit organizations affiliated with exempt higher education institutions, and nonprofit and governmental research organizations are exempt from the H-1B cap.

There are far more IMGs interested in attending US-based residency programs than there are available residency slots. As of July 2014, 9,326 IMGs were eligible but not yet assigned to a residency program through the National Residency Match Program.

Public Subsidies for Hospital-Based Residency Programs

Whatever influence the federal government has over the pipeline of physicians stems from its support for residency training—called graduate medical education (GME)—provided mainly through Medicare, Medicaid, and the Department of Veterans Affairs (VA). In 2015 (the last year for which data are available), total federal spending on GME was $14.5 billion, according to the Government Accountability Office (GAO). Total federal and state support for GME, which includes the state share of Medicaid GME spending, was $16.3 billion.

Medicare is, by a wide margin, the largest source of financial support for institutions engaged in residency training.

When Congress created Medicare’s prospective payment system in 1983 to replace cost-based reimbursements for hospitals, it also established two separate add-on funding streams to support residency training.

The first -- Direct Graduate Medical Education, or DGME -- is supposed to offset expenses such as the salary stipends paid to residents, the salaries of the physicians supervising them, and associated overhead costs. The second -- the indirect medical education subsidy, or IME -- is supposed to compensate teaching hospitals for costs that nonteaching facilities do not incur, such as the additional tests that residents may order.

The IME payment is calculated as an add-on to the regular Medicare PPS rates, equal to roughly 5.5 percent of the base amount. The Medicare Payment Advisory Commission estimates that the actual added, indirect costs of residency training is only 2.2 percent of teaching hospitals’ expenses.

Medicare reinforces the centrality of accredited institutions by stipulating that GME funds can be paid only to hospitals with residency programs approved by either the ACGME or the AOA. Beyond this accreditation requirement, however, the federal government has taken a hands-off approach to Medicare GME oversight.

A Framework for Reform

While a licensure system for medical profession is necessary to enforce high standards, some reforms could make the current process more adaptable to signals from patient demand.

Modernize Public GME Support. The federal government’s financial support of GME should be modified not to cut overall costs but to address the shortcomings of current law. Medicare, Medicaid, and VA funding for GME should be combined into one common payment stream, with some of the money directed toward the residents themselves in the form of vouchers or similar assistance. Further, nonhospital institutions should be allowed to compete for the funds, as most physician care now takes place in ambulatory settings.

Promote Medical Oversight with Looser Ties to the Profession. The federal government should use the leverage its funding of GME provides to steer state governments toward a more balanced and neutral system of professional oversight. In particular, the federal government could stipulate that GME funds should be tied to a credentialing system that has looser tied to the economic interests of the academic medical centers and practicing physicians.

Develop Market-Based Fees for Physician Services. Like other professions, a critical factor affecting the physician pipeline, and the distribution of doctors across specialites and geographic areas, is the fees they will earn when they begin charging directly for patient care. The Medicare fee schedule (MFS) heavily influences physician earnings because private payers also use it as the starting point for their reimbursement schedules. Currently, the MFS is set through administrative processes and formulas, without much regard for the pricing that would occur in a functioning market. Bringing the influence of market signals to Medicare’s physician fees would help balance supply with changing needs of the patient population.

Test and Promote a Shorter Educational Time Frame. In Germany, it takes six years to earn the necessary degrees to become a licensed physician. The US has experimented with a shortened pathway to a medical degree during World War II and again in the 1970s. Since 2010, nine schools (less than 10 percent of the overall number) have been offering three-year medical degrees, mainly to candidates seeking to become primary care physicians. The federal government should encourage states and their medical oversight bodies to test a model of medical education that would begin just after high school. This would allow more coordination of a traditional undergraduate education with a medical school curriculum and perhaps open up the possibility of a six-year time frame for securing both degrees. Residency training would still be required, but the overall costs of becoming a licensed physician would fall, which would help with making the pipeline of physician candidates more flexible and responsive to other market signals.

Create a More Liberalized Pathway to Qualified, Foreign-Born Physician Candidates. The US has plenty of experience with a high percentage of physicians who were born and educated elsewhere, and yet the immigration laws still prohibit large numbers of qualified physician candidates from coming to the US. Congress should amend current immigration law to either exempt physician candidates from the current H-1B cap altogether (beyond the exemption that already applies to certain organizations, including teaching hospitals attached to higher education institutions) or create a new, separate allocation for the physician profession to allow greater numbers of willing immigrants to come to the US and care for patients. This policy could be combined with incentives to encourage these immigrants to practice, at least for some minimum period of time, in areas that have limited access to physician services.

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The US has a highly-trained and effective physician workforce, but the process for obtaining a license may be unnecessarily raising prices and making it harder for some patients to get needed care. The federal government, without usurping the role of the states, should steer states toward reforms that would make the pipeline of physician candidates more adaptable and flexible, and thus more responsive to changing market dynamics. That can be done without sacrificing the quality of care that the current physician workforce provides, and which patients deserve.

James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute. He is the author of “Policies Affecting the Number of Physicians in the US and a Framework for Reform,” published by AEI in March 2020, from which this column and a monograph published by the Regulatory Transparency Project of the Federalist Society were derived.

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