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Deregulation Part 2: The great medical residency bottleneck

Deregulation Part 2: The great medical residency bottleneck

Niklas Kleinworth
June 19, 2023

Taxpayers are about to pay $12.7 million to subsidize medical residencies in the 2024 fiscal year. About $800,000 of this is new spending used to expand the number of residency positions. It’s all part of a larger state government plan to address physician shortages in Idaho as the state still ranks last in the number of physicians relative to the population.

The physician shortage is a potent example of how government regulation stifles the free market’s ability to address shortages and reduce costs. In part two of our series probing the issues with government regulations in health care, we look at how Idahoans are being sold a bill of goods on physician training.

Modern medical education hinges on a physician getting into a residency position after medical school. Residencies typically last three to seven years, depending on the physician’s preferred specialty. 

Students who graduate from medical school are matched with a residency program by means of a mathematical algorithm. After completing only one year of the program, a resident can take the last of three steps of the United States Medical Licensing Examination and become licensed as a general practitioner in most states.

Beginning in the mid-20th century, the federal government started subsidizing medical residencies.  Medicare is now the largest payer for medical residencies, spending $16.2 billion annually. But other government programs like Medicaid and the Veterans Administration also fund these programs.

With subsidies came restrictions on the market, and the medical industry became dependent on the government. Today, there are few options for licensure outside of the medical residency pathway. This created a bottleneck in the market when Congress put a cap on the number of residency positions Medicare would cover. Every year, thousands of people who graduate from medical school will not be able to enter a residency and later practice as a physician. This robs communities of the contributions these graduates could have made to their well-being. 

States, despite seeing the problems caused by regulations and subsidies, decided to respond with more subsidies. In Idaho, the State Board of Education (SBOE) seeks to increase spending on residencies to $20.2 million per year — roughly a four fold increase — for a total 385 residency slots by 2030.

The board expects this plan will produce 1,480 additional physicians by the end of its 12-year timeline. This is far from a solution to Idaho’s physician shortage, as studies estimate Idaho will be short 1,700 physicians by 2030. These estimates were based on 2017 data that predated the SBOE’s plan; they do not account for Idaho’s recent increase in population growth, which has been mostly among the elderly.

Additionally, only about 55% of physicians who complete residencies in Idaho are expected to remain in the state. This means the program would only procure about 813 new physicians for Idahoans.

This weak retention rate also has cost implications for the Idaho taxpayer. The SBOE notes that the state will cover $70,000 per resident — about one-third of the total cost. When factoring in the loss of newly minted physicians to other states, however, Idahoans pay $128,000 to produce a fully licensed physician for the Gem State — 83% more than advertised.

The plan also neglects Idaho’s most needy communities by placing residencies in the state’s most populous areas. In fact, 96% of all residents will be located in one of Idaho’s top 10 largest cities by 2030. About 60% of these positions will be in the Treasure Valley — one of only a handful of jurisdictions in the state that do not have an official shortage of health professionals. If the point is to get doctors into high-need areas, the current plan will not achieve this objective.

Idaho’s regulations governing the physician licensure process are largely to blame for the shortages we see. The only way a physician can have an unrestricted license to practice in the state is to complete a residency. This means any attempt to alleviate a physician shortage must go through institutions that were granted a residency program and are typically dependent on state subsidies to operate. In short, the free market is prevented from using innovation to expand training capacity and directing new physicians to rural communities.

Nationally, there has been a movement to circumvent the traditional residency pathway by providing provisional licensure to individuals who completed medical school but could not obtain a match with a residency program. Under provisional licensure, medical school graduates can practice under a contract with a supervising physician — similar to the apprenticeship model that was common before residencies became mainstream.

This year, the Idaho Legislature passed its own provisional licensure program known as a “bridge” license. This program will give recent medical school graduates a nonrenewable, one-year license to practice under a supervising physician. The candidate must have previously applied for residency and failed to match with a program. The candidate who serves out the one-year license must still be accepted into residency the following year to be fully licensed.

Though this legislation appears to add physicians to the workforce, it does not fix the residency bottleneck. There will still be a compounding pool of candidates applying for residencies. The only difference with the new license is that some of these candidates can get up to one year of experience in the field before they are cast aside.

The only effective solution would be to create a pathway by which medical school graduates could bypass residency entirely. For example, Missouri has the freest provisional licensure laws in the nation. These laws have been in effect since 2014, yet the state still has a shortage of more than 3,000 physicians. This is likely because candidates are still required to complete residencies to receive an unrestricted license. 

Allowing provisionally licensed physicians a more direct pathway to full licensure opens more options for candidates to bypass restrictive and expensive residency programs. This form of deregulation will allow the market to drive physicians where they are needed. Over time, doctors will be able to train in more rural communities and expand the capacity for care in these areas.

Idaho is reaping the results of government overregulation, subsidization, and central planning. Opening the free market will allow supply to catch-up with demand within the healthcare industry. This will lead to better access, health outcomes, and freedom for all Idahoans.

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