Wage Rigidity, Monopsony Power, and Physician Employment in the Public Sector

Public sector and private sector employers often compete for similar workers, while offering jobs that are markedly different on multiple dimensions. Public sector employment, in particular, is often home to more rigid compensation structures and lower earnings potential overall. The Veterans Health Administration (VA) has been no exception. As a government owned and operated health care system, the VA is responsible for the care needs of more than 8 million qualifying veterans across the US. At the same time, the VA has struggled to provide its patients with reliable and timely access to medical services, with some high-profile incidents in recent years. One posited underlying issue for the VA is an inadequate supply of physician labor.

As one attempt to address this concern Congress passed the VA Health Care Personnel Enhancement Act (HCPEA) in 2004. The policy allowed for more decentralized wage setting and consequently more generous and heterogeneous pay for VA physicians. To date, this significant infusion of federal funds and more flexible wage schedule for VA clinical labor is largely unstudied. We leverage federal personnel data spanning more than a decade to estimate the effect of HCPEA on physician job separations rates, recruitment rates, and labor force composition. We do so within a difference-in-differences framework that compares changes in VA physician labor market outcomes against other high-skilled federal employees.

Our subsequent findings reveal that higher wages help VA facilities retain physicians within more specialized fields of medicine. Allowing greater dispersion of wages across specialties leads to compression in their corresponding separation rates. However, the implied separation elasticites are not large and are effectively zero among the largest VA specialty group (i.e., primary care). This suggests that VA hospitals and clinics hold considerable wage-setting power over physicians selecting into federal employment. Rates of new physician recruitment are unaffected by the more generous pay structure, and this is true across specialties. Yet, the composition of new recruits is altered following the policy change. Those accepting VA positions after wage ceilings are lifted are more likely to have sub-specialty training and greater work experience. More flexible salary determination also seems to help the VA to increase staffing in less desirable locations via compensating wage differentials as well as outbid other employers in more competitive labor markets. Taken together, this public entity benefits from increased pay schedule flexibility for physician labor, but the improvements are often modest and sometimes subtle. Future transfers would therefore need to be even larger to resolve lingering physician shortages and may extend beyond what is politically feasible or socially efficient.