Is the Wage Gap Between Doctors and CEOs Why Healthcare Is So Expensive?

Ask anyone and you’re likely to hear a story about a friend or relative who got injured or sick while having health insurance, yet still faced a jaw-dropping bill. Soaring healthcare costs are drawing ire, but drugmakers and insurers aren’t all to blame for the increase. Prescription drugs only account for about 11% of the $3.3 trillion Americans spend on healthcare every year, and the gross margin reported by the nation’s largest health insurer, UnitedHealth Group (NYSE: UNH), has declined over the past five years. The relatively small proportion of spending on prescription drugs and the absence of widening margins for big insurers raises an important question: What else could be to blame for increasing healthcare costs? According to a recent study, the answer might be wages for doctors and healthcare CEOs.

The healthcare wage gap

Analyzing pay trends at 22 major health systems between 2005 and 2015, researchers at University Hospitals Cleveland Medical Center and Case Western Reserve University found that the average compensation for medical center CEOs surged 93% to $3.1 million during the period, a rate that far exceeded the 3% average increase in registered nurses’ pay.

Image source: Getty Images.

The study also found that the average pay for orthopedic surgeons, which are among the highest-paid doctors, and pediatricians, which are among the lowest-paid doctors, increased 26% and 15% over the period, respectively.

Altogether, wages paid to healthcare workers jumped from $663 billion in 2005 to $865 billion in 2015, with nonclinical workers accounting for more than one-quarter of the increase. Additionally, the researchers say 27% of the increase in U.S. national healthcare expenditures over the 10-year span was because of wages climbing.

Healthcare’s increasing complexity and doctors’ presence on healthcare’s front line makes rising wages for them understandable. However, accelerating pay for healthcare administrators is more frustrating because it’s difficult to demonstrate that payers, including patients, receive value commensurate with their increasing compensation.

According to the study, the average CEO now earns 12 times that of a pediatrician and 44 times that of a registered nurse, up from seven times and 23 times in 2005, respectively.

A tipping point

Healthcare systems must pay fair market wages to attract talented leaders and the same is true for specialists and doctors. As demand for healthcare increases because of aging and longer-living baby boomers, wages — and thus, total health spending — are likely to continue climbing unless healthcare supply similarly increases.

Image source: Getty Images.

Absent a groundswell in medical school enrollment, new models of healthcare delivery — such as telehealth — may be the only way to maintain quality of care while also increasing patient access meaningfully enough to bend the cost curve. Telehealth solutions, such as those offered by Teladoc (NYSE: TDOC), can reduce supply bottlenecks by filling empty slots in schedules and offering access outside of traditional doctor’s office hours. It frees doctors up to see more patients by reducing administrative burdens, including billing, and because telehealth doctors don’t need office space to see patients, it may provide a new, less-costly business model for providers, as well.

Increasing the number of retail health clinics, such as CVS Health‘s (NYSE: CVS) Minute Clinics, could also help ease wage pressure because they rely heavily on nurse practitioners and physician assistants to provide care for minor illnesses and injuries that may otherwise cause patients to clog primary care or emergency room lobbies. Other technologies, including wearables that monitor health, may also reduce doctor, specialist, and emergency room visits.

Solutions like telehealth, health clinics, and wearables are only in the early innings of penetrating the healthcare market, but perhaps they’ll be disruptive enough to slow down rising wages over time and help control healthcare spending better than tackling drug costs or insurance premiums alone.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends CVS Health, Teladoc, and UnitedHealth Group. The Motley Fool has a disclosure policy.

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