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Can Earnings Decline Cause a Retirement Flight of Physicians? Financial Compensation and the Decision to Stay in Practice

Indiana University, Kelley School of Business

David A. Nakata

Indiana University School of Medicine

The authors analyze the historical correlation between annual change in the population of inactive physicians and annual change in the real net income earned by the average physician per hour of patient care. For a sample of nine census divisions across 8 years (1986-1989 and 1994-1997), two regression models conclude with 99% confidence that a fall in net income increases the outflow of physicians from active practice. Regression coefficients estimate that a $1.00 fall in hourly net income increases the population of inactive physicians by 1.46 percent after a 2-year period. Based on 1999 population data, the authors project that an earnings decline of $10.00 per patient care hour motivates 11,000 physicians to retire early. With projections of between 50,000 and 150,000 excess practitioners in the U.S. health care system, the analysis suggests that deterioration in financial compensation can erase part but not all of a physician surplus through early retirement.

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