Physician Compensation Highest
in States with Resident Shortages
South Dakota’s physicians are making national news. The Washington Post has recently published a new study from the National Bureau of Economic Research that found that the best-paid docs in America actually live in South Dakota, North Dakota, Alaska, and Wyoming.
There are a couple different factors at play here, but the author’s thesis is correct. A lack of physician residency training programs in certain states is a major factor driving up physician compensation.
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Physician Compensation Highest in States with Resident Shortages
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All U.S. hospitals report the number of provider-based (hospital-based) physician residents and non-provider-based (outpatient) physician residents on their annual Medicare cost reports. According to this data, Wyoming, Alaska, and the Dakotas made up four of the six U.S. states with the least physician residents. Residency training programs are major recruiting sources for physicians. Not having residents makes physician recruitment much more expensive.
States With Least Residents Reported by Hospitals (2022)
During 2020, a nine-year study of the relocation patterns of over 270,000 physicians was published. The study found that about nine out of ten physicians initially stay in the same market where they completed their residency or fellowship training. Most of these docs start practicing in the exact same ZIP code, or an adjacent ZIP code, to where they completed their training.
It turns out that physician residents are human beings. They get married. They buy houses. And they have kids. Once they put down roots, they tend to stay put.
Of the few physicians who do move, less than 20% move to rural communities. Recruiters informed the author of the 2020 physician relocation study that they actively seek to identify physicians who grew up in rural communities to try to recruit them to move back to their hometowns. Recruiters know from experience that the chances of convincing anyone else to move are quite low. The only way to overcome this resistance is to offer much higher compensation packages.
Of course, the confounding factor here is reimbursement. Indiana has similar resident ratios to North and South Dakota, but physician compensation tends to be somewhat lower in Indiana.
Population-to-Resident Ratios
As Reported by Hospitals (2022)
That’s because commercial reimbursement rates are lower in Indiana. When compared to Alaska, Wyoming, and the Dakotas, Indiana has a higher concentration of commercial managed care enrollees in one very large and dominant insurance company. The insurance carrier Elevance holds 75% to 90% of commercial PPO market share in most major Indiana markets. This high managed care concentration in one carrier drives down reimbursement rates and physician compensation.
Indiana PPO Market Share: Elevance Health
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