Underpaid: Why Resident Physicians Are Paid So Little

Over half of current doctors in training believe residents are significantly underpaid. And I don’t think they’re wrong. The question is, why is that the case?

In this post, I’ll show you how resident salaries are determined and explain why that results in such little pay.

Resident physicians make on average ~$13.00/hr when accounting for duty hours worked. Compared to other professions with similar or even lower levels of training, resident pay appears very small. This is because resident graduate medical eduction (GME) funding is primarily provided by Medicare, but salaries are decided by the teaching hospitals themselves. And there isn’t much incentive to increase pay.

Why would residency salaries be decided by medicare funding? Why not determine salaries in some other way, like letting the market decide? That’s how most other professional salaries are decided, right? The answer is a little bit complex. Let me explain.

How much doctors get paid during residency

First, here are the average salaries for residents by post-graduate year in the US. Because the amount spent on resident salaries is determined by individual teaching hospitals, there’s no standard national salary. Training in one region or another could easily result in higher or lower amounts. Medscape is an excellent resource to see different salaries by region.

However, it is standard for resident salaries to increase with each successive year in training, as you can see below. And while not standard, individual program salaries don’t vary much from the national average.

Residency Post Graduate Year	Average Salary
PGY-1	$57,100
PGY-2	$58,800
PGY-3	$61,000
PGY-4	$64,500
PGY-5	$66,800

How Resident Salaries Are Decided

Residents are paid by their teaching hospitals. Which means that as a resident, your salary is simply a hospital business expense. And as we know, corporations, including hospitals, like to keep expenses low. If they could, hospitals would probably employ you for the cost of “an education, food, and housing”.

Kind of like what the NCAA does for college athletes.

Actually, this is exactly how it used to be. Way back before the 1960s, resident physicians really were hospital “residents”. Being a doctor on its own is highly competitive, and there’s a huge number of people who want the job. Hospitals knew this and knew they didn’t have to pay much. So they gave them a place to sleep, food, and worked them. Hard.

That is until the creation of Medicare and the ACGME.

Medicare Pays Hospitals Per Resident

In 1965, President Lyndon Johnson signed Medicare into law. And for one reason or another, the US government made sure that funding residency education was a part of it. Why? I’d like to think it’s because they know exactly how valuable residents are to a hospital and wanted to pay them their worth.

It turns out they actually just wanted to make sure we had enough doctors. Specifically, they said this:

“Educational activities enhance the quality of care in an institution, and it is intended, until the community undertakes to bear such education costs in some other way, that a part of the net cost of such activities (including stipends of trainees, as well as compensation of teachers and other costs) should be borne to an appropriate extent by the hospital insurance program.”

(House Report, Number 213, 89th Congress, 1st session 32 (1965) and Senate Report, Number 404, Pt. 1 89th Congress 1 Session 36 (1965))

(Spoiler alert: “some other way” never happened.)

All of a sudden, Medicare/the Center for Medicare Services (CMS) provided about $10 billion for medical training, with approximately $5 billion of that being set aside for resident salaries.

These new CMS payments that suddenly made up the lion’s share of residency funding were separated into two areas: Direct Graduate Medical Education (DGME) payments and Indirect Medical Education (IME) payments.

IME is intended to cover the “excess costs” of a teaching facility, like longer wait times due to time spent teaching or loss of revenue from resident inefficiencies. You can ignore that for now.

DGME is where Medicare pays for the direct costs of residents. Teaching stipends. Building maintenance. And yes, resident salaries.

How they decide how much to pay gets a bit tricky. But let me try to explain:

There are two main terms to know here: the PRA and the “base period”.

To get to the DGME amount, Medicare uses something called the PRA, or the per resident amount. This is just a number calculated by taking the average spending on DGME costs during the “base period” and multiplying it by the number of residents during that base period.

What is the base period? It’s simply the year they started calculating the PRA for residency programs. Most programs that were active at the time had their base period set at 1984. Costs during the base period were the DGME costs at the time. For newer programs that started after 1984, they use either an average of DGME costs for surrounding hospitals or the average costs for the first few years the program is open, whichever is lower.

It’s definitely a bit complicated, but this “per resident amount,” or PRA, is the basis for how much residents get paid.

Once Medicare calculates the PRA, they multiply it by the number of full-time equivalent residents currently working in all areas of the hospital (and non-hospital sites, when applicable) and by the hospital’s Medicare share of total inpatient days to get the total DGME payment.

It ends up looking something like this:

DGME = PRA * # FTE residents * (Medicare Inpatient Days/Total Inpatient days)

Or about $102,800 for primary care residents in 2017.

How Does The Money Get Split

If you’re in residency or someone who went through residency, you probably noticed that residents are not getting paid $100,000 per year.

That’s because the Medicare DGME money gets split. Remember, direct costs include resident salaries, but also teaching costs, building maintenance, and more.

Resident salaries are just a part of that 100k.

The teaching hospital itself decides how much of the pie residents get, and essentially gets to keep the rest. Maybe that’s why we’ve been seeing so many new programs opening up? (I’ll save that for another post).

Thankfully, even though current resident salaries are a lot lower than 100k, they’re still much higher than the “housing and a hot meal” of the pre-Medicare era.

Nowadays, there’s at least a baseline amount that most programs give. Somewhere around 50k/year for a first year resident.

And over time, Congress has continued to write more more laws that modify that initial Medicare/CMS agreement and affect your salary. For example, consider the law written in 1997.

In 1997, congress passed the Balanced Budget Act. This law capped the number of residents they were willing to fund through Medicare. Boom. Suddenly no more residency growth.

Then, in 1999, with the Balanced Budget Refinement Act, they set limits to the PRA funding and eliminated inflation adjustment for some facilities.

I could go on, but I think you understand. The bottom line is this: as long as Medicare is the primary source of resident education funding, salaries can and do change based on who’s currently in office.

Hospital GME Funding Outside of Medicare

Now, residents do get some funding from their individual hospitals, whether through non-Medicare patient revenue, fundraising and donations, state grants, or other sources. But once again, not all of this goes into resident salaries.

In the end, the hospitals are the ones who collect the money from Medicare and other sources, and they’re the ones who decide how to spend it.

Could they increase resident salaries by 50%? Probably. But do they need to? I doubt it.

Whether salaries were 50k, 100k, or “a room and a hot meal,” I’m willing to bet the match would still fill up.

Are resident doctors underpaid?

Now that we know where resident salaries come from and why they’re paid as much as they are, it begs the question: Are resident physicians actually underpaid?

I know that I, and most other physicians I know, would argue absolutely yes. But I know there are some who would disagree. I actually had this discussion with my brother, a non-medical person who spent 3 years in law school and now works in the corporate world, and he completely disagrees.

I’ll share both of our arguments here.

Argument: Resident physicians are underpaid

As far as I see it, when you graduate medical school, you’re officially a doctor. That doesn’t mean you’re fully trained, but it means you’ve earned the ability to generate an income as a physician. On top of that, chances are you’re also carrying around $200,000 in student loan debt. While carrying debt doesn’t entitle you to an income, four years worth of training absolutely does.

Thankfully, in residency physicians will start making money without needing to take on more student loan debt. But as an intern working 80 hours/week, you’ll make around $13.72/hr. More than the current minimum wage, but less than an Amazon warehouse worker. In the meantime, while you aren’t signing up for any more loans, your debt is continuing to grow.

Interestingly, as a first year resident, I don’t believe you’re actually underpaid (even if over 50% of you disagree). If you filed taxes as a medical student, your loan payment should be close to $0. After taxes you’ll take home somewhere around $3500/mo. And you’re nowhere near the level of competency in your specialty that you need to be, so most of your time is spent eating, drinking, and breathing medicine. At this stage you take more than you give.

But by the time you’re through your second year and beyond, the scale starts to tilt. Even as a second year resident, you’ll typically start functioning more independently as a physician. Your competency has increased exponentially and you’ll start generating significant value for the hospital. That change is what starts to make residents underpaid.

As a second and third year resident, you’ll make a little under $15/hr. That’s because your salary is artificially determined by your residency program as I explained earlier in this post. Compare that to nurse practitioners and PAs who provide a similar level of care as you do but make closer to $100k/year working significantly fewer hours than you, mostly because their pay is determined by their job market.

Yes, as an intern or first year resident, your role is primarily learning. You’ll still see patients, write notes, and do other work for the hospital, so it makes sense that you get paid, and I think you get paid fairly. But as you progress into your second year, third year, and beyond, the value you provide to the hospital grows exponentially. Meanwhile, your salary grows minimally.

Instead, why not set resident salaries to better reflect that value? Even in your later years of residency, you are still training and shouldn’t make a full attending salary. But while $57k is fair for an intern, $61k isn’t fair for a third year. The difference in revenue you provide to the hospital is much more than $4k/year. I would argue to maintain intern salaries on the current system, but for residents to be fairly paid, they should see significantly larger salary bumps year over year.

Counterargument: Resident physicians are fairly paid

I am The Average Doctor’s brother and everything I type here will be in italics so you know it’s from me. I am not a doctor but instead went to law school and eventually ended up working in finance. Everything I know about medicine has come from The Average Doctor or personal experience but having trained in the finance world, I’ve learned a lot about salaries.

I believe that resident physicians are fairly paid because their salaries are aligned with the top 22% of earners in America in just their first year of residency. I agree with The Average Doctor that the ratio of learning to providing value that residents have while in training decreases over time and begins to lean toward providing value.

If there wasn’t a license requirement, I would also agree that residents in later years of training should be paid more. But because there is a huge license requirement involved with being a physician, then you cannot be paid like a physician until you obtain that license.

Even as a resident, The Average Doctor made more than 78% of Americans and was able to live a very comfortable life. And only a few years later was able to make enough to be in the top 5%. To me it seems like throughout training, he wasn’t paid enough to live an extravagant lifestyle, and he did work an awful lot, but he seemed to do well and was in a pretty good financial situation after training.

Low Residency Salaries?

According to the Medscape Resident Salary and Debt Report, a little under 60% of residents feel unfairly compensated. That means over 40% do feel fairly compensated. That makes this a pretty close to coin-flip discussion.

You’ve read my argument and my brother’s. Which do you agree with?

At the very least, I will say that I agree with my brother when he said I was in a good financial situation after training. Whether you think residents are underpaid or not, it’s something you can do too. And something I’ll hopefully be able to teach you as this blog continues.