With the 10% cuts looming, I find myself wondering
Every action in life has an opportunity cost.
The cost of time.
The cost of stress.
The cost of health.
The cost of weatlh.
If I choose to watch TV instead of work out. I lose the opportunity to cardiovascular workout and all its benefits. I may gain information on an educational TV show or a good laugh. But every action has an opportunity cost.
Lets assume I became a biomedical engineer instead of a doctor. Lets check out my opportunity cost.
Here are the initial assumptions.
I graduated from undergrad with a 4 year B.S. from University of (Name Your State) debt free.
I am single.
I am 22 years old
I am healthy.
This site gets me my starting salary. My assumptions are as follows.
I have a B.S. in biochemical working as a biomedical engineer. I start at the lowest level of the ladder in a corporation>2500 employees in Phoenix, AZ, a city which is trying to become a haven for medical research.
My starting salary is $62, 500 as a starting engineer.
B.S. in biochemical engineering
22 years old.
Debt free.
I make some more assumptions.
Assume long term inflation of 2%/year
Assume an average raise of 4%/year above inflation (6%) as I work my way up the corporate ladder. A VP of Engineering with 30 years experience makes about $200,000, three times as much as a starting engineer (according to the same website listed above). I used this inflation calculator
By stripping out inflation you can calculate the average yearly salary increase as I work up the corporate ladder for the next 30 years.
Year one salary $62,500
Year 30 salary $200,000.
This equates to approximately a 4% raise above inflation, every year for the next 30 years. If you factor in my conservative 2% rate of inflation, my yearly salary increase will be 6% per year, every year for the next 30 years.
The value of my total income, adjusted for inflation for the next 30 years will be 3.7 million dollars.
Lets assume I started contributing 10% of my salary to my 401K at age 22, my employer contributed 5% of my salary and I retire at age 52, after 30 years of service. Inflation at 2%, Return of 10%/year, I will amass 1.8 million dollars (inflation adjusted) in my 401K when I retire at age 53.
Not including benefits or bonuses, my total cash compensation for my life as a biomedical engineer, earning a B.S. degree, leaving school with not debt, no weekends, no nights, no malpractice insurance no patients, no insurance headaches and enjoying my twenties with style is
5.5 million dollars
Lets take a brief look at primary care. Lets make the following assumptions.
I finish undergraduate school from University of (Name Your State) with no debt. At age 22.
I get accepted that year to University of (Name Your State) Medical Center with no scholarship funding. Fully funded by student loans. Assume $25,000/year in tuition/fees/books/equipment per year. Add an additional $20,000 (bare bones) living expenses and you are left with $180,000 in student loans for 4 years of medical school.
I can not work for those 4 years of medical school. I have no income due to the rigorous nature of the education.
I do not contribute to any 401K as I have no income and I have no savings.
Lets assume I decide to enter a family practice residency at age 26. I am paid on average of $45,000/year for 80 hours/week. Roughly $11/hour. For 3 years.
Lets assume I start working as a board certified family practice physician at age 29. I do not expect any raise. In fact I expect declining reimbursement according to the SGR formula of reimbursement for all physicians. To the tune of 40% over the next 5 or so years.
Lets make a giant assumption that Congress will intervene. Instead of a 40% cut over the next 5 years, we are "saved" by receiving a 1% above inflation raise. Or 3% rise per year. (A pipe dream).
Lets use $160,000 as my salary. Lets assume a 1% rise per year in income, EVEN when corrected for inflation. This is a very generous assumption as physician incomes have not kept pace with inflation. Down 10% when corrected for inflation in the last 10 years. But lets be generous and assume Congress wont drop my income 40% in the next five years. And lets assume I actually get a yearly pay RAISE, above inflation, of 1% per year . (This would be a 3% rise per year with a 2% inflation rate).
Lets calculate my 23 year salary so I retire at the same time as my alter ego, Mr. Engineer.
I Earn $45,000/year for three years of residency or $135,000 Add this to my salary as a family practice physician for the next 23 years (4.32 million dollars) and the total value of my income is 4.5 million dollars
Lets assume I start contributing to my 401K during residency , 10%/year or $4500/year for 3 years for a total of $13,500. I also continue contributing at age 29 when I start my job and continue until my retirement at age 52. I contribute 10% ($16,000/year) into a 401K. I do not contribute a matching amount to my self. For simplicity, lets assume 10% however to keep Mr Engineer equal with me.
The value of my 401K, using the same variables at the time of my retirement at age 53 will be worth an inflation adjusted value of 1.2 million dollars.
So total income and retirement at age 53:
For Dr Primary Care: 5.7 million dollars.
For Mr Engineer at: 5.5 million dollars.
But I'm not done yet. We have to factor in my $180,000 student loans.
Lets assume a very generous interest rate of 4% amortized over 30 years. At 4%, a monthly payment of $860/ month is required. You want to try paying it off in 15 years? Over $1300/month. Non tax deductible interest due to current tax laws.
$860/month for 30 years. Friggin unbelievable!
And how much does that $180,000 end up costing you in principal and interest?
$310,000
Subtract that from your 5.7 million and you are left with 5.4 million dollars.
And this is full of highly conservative assumptions.
My alter ego Mr Engineer just came out ahead.
BUT it gets worse!! Much worse!
Lets look at that 401K fund. At age 53, the engineer has 1.8 million dollars and the primary care doctor has 1.2 million dollars. Lets assume both retire at age 53 and live off a family trust of equal value and let that 401K grow until the age of 67 years old. Neither contributes a single penny to the fund once they retire at age 53. They let the magic of compounding do its work. Assuming 10% return/year, which is in line with the average S&P return for decades.
What will the value of the engineers 401K fund be worth? 5.6 million
What will the value of the primary care doc's 401K be worth? 3.7 million
at age 67, the value of income for Mr Engineer: 11.1 million dollars
at age 67, the value of income for Dr Primary Care: 9.1 million dollars.
The Engineer wins by 2 million bucks, or $45,000/year more than the primary care doc for 45 years.
And he did it with the beauty of hard work and market economies.
Primary care is dead. If I can make more money right out of college, with nothing more than a B.S. then the opportunity cost of primary care is too great. The end of delayed gratification has arrived.
I will try and show in the near future how this concept has polarized the specialist vs primary care debate/medical students talking with their wallets and why any fix will require support of primary care as a whole.
The Engineer wins this one. With time, the delayed gratification will hit specialists. Some are there already (general surgery). Some have a ways to go (everyone else). But the system is failing everyone.
We will all be patients one day. And engineers don't practice medicine.
16 Outbursts:
It gets worse than that-- the engineer works for a company that has equity upside, performance bonuses, and strong benefits.
The primary care doc (if working for themselves) has no equity growth prospects (non-scalable service business), no performance bonuses (pay for performance is all stick/ no carrot), and reduced scale to get good benefits deals (outside of that vacation stuff).
Ultimately, though, it comes down to doctors being really poor business people for the most part. As Roy Poses and Rich Fogoros have blogged, why are doctors signing these ridiculous contracts to begin with? Only once a critical mass of providers shake their current shackles will Medicare and the insurance companies be forced to use different tactics.
I am a fairly new reader to your blog, and I am really enjoying it. I am also a chemical engineer and a medical student, so I particularly enjoyed this entry.
When I quit my job to go to med school, I knew that it was a bad investment, and it was clear to me that I was not doing it for the money. However, no straight out of college med student would believe this, so it is really worth explaining.
you mean they really aren't doing it for the money? :)
my wife and i are on 30 year repayment plan (same payments throughout) for our educational loans. we have 8%+ and well over 200k in loans. that translates into over 2k a month for 30 years.
yikes! my son will be well out of college before we are done if we don't do things differently.
you present an interesting academic exercise, but imo a little one sided. i fully agree with dr. goel in that the docs are really poor business people, and that seems to be magnified in primary care. they need to merge into larger groups so that they can hire business managers to focus on that important part of the practce. a lot of times they are very nice individuals who just choose not to pay attention to necessary parts of the business and instead feel trapped into a system that denies them the opportunity to make a (decent)living. still even with the best of reimbursement circumstances and good business practices, it will be a huge struggle to make 160k for primary care. it may be a self-fulfilling prophecy-bad business people tend to choose primary care specialties for other very valid reasons.
do you consider hospitalists primary care? are they the ones putting the stake in the corpse of the outpatient internist? do these salary surveys separate out the hospitalists who are generally better earners than the outpatient providers?
thanks for doing the math!
anon, I don't know how the surveys are done. The supply and demand for hospitalists have caused their reimbursment rates to exceed other internists in the last few years. That's the market for you. Hospitalists didn't cause the death of primary care. It is a response to it.
I consider myself an internist who works exclusively in the hospital. If that's primary care, than so be it.
wow! nice calculation...haha...
Man, this... is brilliant. And awful. How soon before I can take my MD and sell my soul to Wall Street?
I am a Registered Nurse. In light of this blog topic - I made an even poorer choice than becoming a PCP... In light of that, this post also reflects the sad reality that society as a whole doesn't seem to be concerned. As long as they can watch the football game on Sunday, make their car payments and buy some junk from Wal Mart or invest in some fine Chinese electronics from Best Buy - they don't want to cough up anything for a copay when seeking care in an emergency room - let alone give a rat's behind about the caregivers that their health may depend upon some day...
Gabbiana,
It doesn't necessarily mean you're selling your soul to use your MD in a different way-- I used mine to gain a business skillset at McKinsey (management consulting) the last 4 years-- which now allows me to help shape the system by putting my energies into disruptive businesses that can change the way things work.
Anon,
I'm not sure that larger groups are the answer-- people want relationships with individual doctors, and the group approach tends to corporatize medicine.
I think the internet allows docs to practice in a very different way-- you may see an explosion in the ability to perform good medicine with much less overhead, whether that be by different in-clinic approaches, different business models (e.g., retail clinics), telemedicine, and outcall medicine (housecalls, site visits).
I'm building a different business back end for providers to encourage the ability to differentiate and make choices between health providers. There are a lot of opportunities for new practice approaches (and revenue models) if we move away from the commoditized, price-imposed approach of the large insurers.
I actually think that the market will eventually force medicare as well as patients to pay primary care physicians reasonably. I talk about it on my blog (fineartdoctor.com/blog)
dr goel-
i find it fascinating that you still think solo or even small group primary care providers can survive.
the current model will have to change drastically. i am not sure it will matter what patients want.
i do not think the organization of primary care groups will require them to change their practice plans greatly. it certainly might if the groups are not financially viable due to bad practice habits. however it might be possible to merge under a corporate structure to gain some economies of scale administratively and in terms of negotiation.
ymmv
I am an engineer. Not biochemical, though, software engineer. With an MS in Computer Science, not BS, working for a Fortune 500 technology company, in research; have patents and papers. While I think I might be better off than an internist in many respects, I think a couple of your assumptions reflect lack of knowledge of corporate America.
1. You assume an yearly 4% raise above inflation. This is a very high raise, and very unrealistic. Some companies have inflation adjustments, most don't. Sometimes you get a 2% raise regardless of the inflation, sometimes you get a high raise, sometimes you get no raise at all - e.g. when company isn't doing great or meeting Wall Street expectations. 7% raise is considered very good. For example, here are my raises (total, no inflation adjustment) during last 4 years, starting from the last one and going backwards ("exceeded" evaluation last year, "solid" evaluation during previous years): 7%, 4%, 0%, 3%, 0%. Company raises is a function of two variables - your performance compared to others and the company's performance. In a publically-traded company, two bad quarters before the time of the raises often means no raises for most employees; sometimes two bad quarters mean layoffs.
2. You use a vice president salary as an indicator of what an engineer could be making in 30 years. However, most engineers don't become vice presidents. In order to become a vice president earning this high salary, you need to have some business acumen in addition to technical skills. Not everyone has that.
Additionally, sometimes external factors drastically reduce the engineers salary. For example, software engineers salaries went up considerably during late 90s. Then came dot-com crash and salaries dropped. Some companies in Silicon Valley were firing people earning 90K only to hire them back to the same position for 70K. The salaries now are still way below the 2000s heights.
And then there is outsourcing... But this is another subject alltogether.
The numbers were run back in the early-mid 1990's for law, business (MBA), specialty medicine, and primary care medicine.
For lifetime return on investment, it's MBA, followed by a tie between law and specialty medicine, with primary care the worst return.
It was in JAMA or NEJM.
I have to agree with the Computer Scientist about some of the engineer downsides.
It's not a big unusual to get to be senior level and discover that employers are just as happy to hire in a foreigner on an H1 Visa to do your job for half the cost.
You also face constant re-training. Technology doesn't stand still. It can be very difficult for an engineer to become employed in their 50s at a senior salary.
If, as the previous poster pointed out, you don't move into management then you can end up scrambling for work if you have settled into something you love. You can also be looking at changing employers frequently to keep up with the work as engineering and CS are often contracted out.
Engineers are prone to boom/bust cycles that physicians aren't. Go to Texas and ask a Petroleum Engineer if it's always gravy.
There is also a BIG respect factor. Whether a physician is making what he/she thinks he deserves or not, they command considerable social respect. Engineers, although often well-paid, are considered Geeks.
Social respect?
One of my partners has practiced medicine in Sudan, South Africa and England.
Compared with those three cultures, in his experience Americans have the least respect for their doctors.
Just plain rudeness.
Social respect went out the window when every patient became a Dr Google.
Obviously my comparison was very superficial, but not unrealistic.
"You also face constant re-training. Technology doesn't stand still."
I am anon software engineer from 10:35, and I totally agree with that. I constantly need to learn new technologies. Every year. Otherwise, I will not be able to compete with young graduates, much less with smart folks in India, China and Eastern Europe. At least in CS the technology changes so fast that often by the time you buy a book, it is already outdated. Thank god for the web.
And then there are performance evaluations and ranking. At my company it means you write a one page summary of difficult and important things you accomplished during the year. Then you are compared to everyone else in your organization and ranked. Some projects have more of an impact than others, other projects are cancelled for business reasons; you may work very hard but be below someone who is working on a project with higher visibility.
Two yearly evaluations in bottom 5-10% in a row and you have two months to show "immediate improvement" or be fired. I've never been in this situation yet - but I've seen some good people getting bad evaluations. This is not the same as layoffs when the whole groups can get cut. A promotion is good, but it often makes you more vulnerable: you get more money, but the position requirements are different and you are ranked based on your position's requirements. At higher levels you also need to be able to start new projects and get funding for them.
Now, there are good things too about being an engineer. You aren't likely to be sued if you are an engineer working for a company. You often have flexible hours, you can telecommute. The flipside of this is that if you need to work longer hours or on weekends you do it and you don't get paid for it.
There is also almost constant stress. Not the same type of stress as for doctors, but stress nevertheless. Your deadline is today and there is a problem and you have no idea how to find it; the schedules are so crazy there is no way you can get everything done in time, even if you work through holidays and weekends; you have a demo to do and everything starts breaking because you or your collegue made a mistake at the last moment or you forgot/had no time to test for something. Or just a problem you don't know how to solve.
As to respect - you cannot deny that at least you are popular with opposite sex. I had a friend, a man with a PhD in Math. His card said Dr X. When women saw Dr on his card, they were all over him. As soon as he explained that he is a different kind of a doctor, most women lost interest. Now, I am a woman, so this is not that important for me, but for men...
primary care is dead ! nobody do it !