Physician licensure and quality: Part IV

Another example of how physician licensure affects earnings is a paper by Keith Leffler. In the paper, Leffler looks at the different states who accepted and refused to accept the Federal Licensing Exam (FLEX) in the late 1960s. Leffler proposes that if physicians acted as a cartel, only states with lenient state examinations would accept the federal exam. This is because people who pass the stricter federal test would have passed the state test anyway. On the other hand, states with more difficult exams are likely to refuse to accept the FLEX exam since by accepting the national exam the state medical association would be increasing the supply of physicians and thus decreasing the monopoly rents for each doctor already in practice. A simple empirical examination seems to prove Leffler’s point:

Physician salaries (thousands $)
Year Accepting Nonaccepting Δ
1965 43.6 45.2 1.6
1966 45.8 48.4 2.6
1968 50.0 52.7 2.7
1970 46.2 52.3 6.1

One can easily observe that nonaccepting states (i.e.: those who were able to restrict the supply of physicians) saw large increases physician earnings over the 5 year period shown. Leffler does conclude, however, that “like Peltzman’s model of regulators, the regulators of physicians seem to reach an equilibria where consumers and the regulatee share the gain (and the pain).”

Leffler (1978) “Physician Licensure: Competition and Monopoly in American Medicine” J Law Econ, Vol 21(1), pp. 165-186.