employees who must be paid at locally prevalent salary scales, and self-employed physicians should be paid at a rate that allows them to compensate themselves in line with salaries of their local employed colleagues.

Since the objective at this point is to assess the relative costs of equivalent physician labor to practices in different areas, an obvious solution would be to use current mean or median earnings of a group of physicians (or a standardized mix of specialties) to determine the ratios, thus making physicians their own reference group (corresponding to an inclusion factor of 100%). The committee rejected this solution, however, because of the same concerns about circularity that motivated the search for wider reference groups than hospital employees (in the hospital wage index) and physician office employees (in the practice expense GPCI). Because almost all physicians work in the health care industry, expanding the data source for physician earnings beyond the health care industry would not solve the circularity problem inherent in using physician wages for the work GPCI. Such an approach would incorporate local wage distortions into the wage rate, potentially making it possible for a large practice or group of practices to affect or even manipulate their physician work reimbursement rates within a market.

The committee therefore turned to economic theory for a rationale for a more indirect approach. The economic argument for varying physician compensation across areas is that, in general, compensation varies inversely with the affordability and desirability of an area as a place to live and work; thus, both a lower cost of living and greater availability of amenities (cultural attractions, low crime, and access to outdoor activities, for example) will tend to depress wages. (See the discussion of the theory of compensating wage differentials in Chapters 2 and 5.) Under this theory, wages will adjust so that the marginal physician choosing among locations will be indifferent among high-wage but less desirable options and lower-wage but more desirable options, while those with various preferences off the margin will sort into the locations in the quantities required to satisfy demand.

There is no way to directly assess the relative desirability of areas to physicians. For the reasons given above, the committee prefers not to rely on physicians as the reference group. However, it seems reasonable to assume that other reference groups with similar levels of education and income to physicians and similar degrees of professionalization might have similar location preferences, particularly with regard to the trade-off between income and amenities. A wage index calculated from such groups might then be used to estimate appropriate payment to physicians. The current GPCI adjustment starts with such an index, calculated from seven professional groups: architecture and engineering; computer, mathematical, and life and physical sciences; social science, community and social service, and legal; education, training and library; registered nurse; pharmacists; and art, design, entertainment, and sports and media (CMS, 2010).

A limitation of this approach is that different factors might affect wages for physicians and other professional occupations. For example, a physician’s skills are geographically nonspecific and highly portable—oncologists or pediatricians who practice in Nashville have much the same skills as their respective counterparts who practice in New York City. But lawyers who practice in New York City include a much higher proportion of employees of large corporations and investment banks, and differences between median incomes of lawyers in these cities reflect this difference in professional mix within the occupation as well as the amenities and cost of living differences between cities. Similarly, teachers’ wages are affected by factors such as local school funding policies and unionization, which are not relevant to physicians.

On the other hand, amenities that might be attractive to some physicians, such as the opportunity to do research or teach in an academic medical center, are not relevant to other

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