Washington has created a doctor shortage — here’s how to end it

This spring, more than 9,000 medical school graduates remained without residency, a record number that reveals a deep flaw in how Washington funds physician training.

Without a residency, these doctors must either face a lost year and try again, take on research or administrative work, or leave medicine altogether. Meanwhile, the United States faces a growing shortage of doctors. Incredibly, federal law still limits the number of doctors who can enter residency training each year.

This tragic waste of talent that could be working to serve patients is the product of government regulation and bottlenecking. It limits the number of doctors in the United States at a time when huge waves of baby boomers are reaching retirement, pushing demand for health care services to record levels.

The government’s Health Resources and Services Administration forecasts in a 2024 report that the physician shortage will reach 187,000 by 2037. To improve the number of residencies available and match more doctors to the jobs that need them, the United States must return physician training to market forces of supply and demand.

After medical school, graduates must complete residency—a period of supervised hands-on training that is required for licensure.

So, who actually pays these resident doctors? To a large extent, you do this, not through your hospital bill as you might expect, but primarily through federal Medicare taxes, which support graduate medical education at teaching hospitals.

In the Balanced Budget Act of 1997, Congress capped the number of residency positions that Medicare would fund at each teaching hospital at 1996 levels.

The intention was to contain spending on medical care, as higher medical education is one of its major expenditures. At the time, policymakers believed there might actually be a surplus of doctors, and in the 1990s, the American Medical Association and the Council for Graduate Medical Education predicted a surplus of doctors and supported “right sizing” the pipeline. Their position indirectly supported the residence cap. As Leah Pearson, a researcher at Harvard’s Petrie Flom Center, notes, the American Medical Association once lobbied to end federal funding and cut residency positions.

Medicare through the Social Security Amendments of 1965 explicitly provided for payments to treat Medicare patients in hospitals, as well as allowing higher payments to teaching hospitals that train doctors on the idea that helping these teaching hospitals cover the additional costs of training doctors would have a broad societal benefit.

This arrangement of allowing the government to fund medical residencies creates a funding bottleneck that is subject to the influence of various medical lobbies such as the AMA who have historically called for caps and limits on available accommodations. This has helped keep the supply of practicing physicians low and physician wages high.

Even prestigious hospitals that can selectively select candidates benefit from maintaining the current system because federal funding supports residents’ salaries, keeps labor costs artificially low, and ensures a constant flow of highly skilled but inexpensive medical labor. Expanding residency openings at these larger hospitals could reduce their “prestige,” limit their ability to be selective, and increase competition for residents, which could lead to higher wages.

Another prominent issue is accreditation, researcher and practicing physician Jeffrey Singer wrote in collaboration with the Cato Institute. The Centers for Medicare and Medicaid Services only supports residency programs accredited by the Accreditation Council for Graduate Medical Education. This limits reliance on large hospitals and medical networks, resulting in neglect or underutilization of many medical institutions that can reliably train doctors such as outpatient clinics, rural health centers and private practices.

Who loses from this arrangement? Patients do. The overall consequences of capping the supply and price of physician training are that there are persistent shortages, making it difficult for patients to find convenient and affordable medical care. This is especially true for rural areas that experience worse health outcomes and lower life expectancy due to shortages of primary care physicians in those areas.

The most effective way to solve the doctor shortage and allow the supply of doctors to flow when needed is to end Washington’s monopoly. Hospitals, states, and even large charitable networks and private donors can step in to fund residency positions. Accreditation should be open to competing institutions that meet transparent quality standards rather than a single monopoly such as the Accreditation Council for Graduate Medical Education currently imposes. Rural clinics, hospitals and private practices could train many more doctors if they were allowed to participate, and would help allocate doctors to shortages.

One state that offers a glimpse of what a decentralized approach can achieve is Texas, which has combined legislative action, state funding, and medical school collaboration to expand residency opportunities and keep more physicians practicing within the state.

In 2017, Texas passed a law requiring all publicly funded medical schools to ensure there are enough residency positions within the state to accommodate prospective graduates. Collaboration among major Texas medical schools committing dollars to support residencies, as well as allocating state funds toward the cause, has created hundreds of additional residency positions at Texas area hospitals.

Congress must also act to allow more new doctors to be licensed. It should phase out the Medicare residency cap created by the Balanced Budget Act of 1997 and allow hospitals, states and private foundations to fund the additional positions directly. States like Texas have already shown what is possible by expanding their funding sources for residency programs.

The physician shortage is not a mystery, but rather a result of Washington’s outdated funding methods and its strict regulations on residency options. Lawmakers should remove these barriers and allow the next generation of doctors to train where they are needed most.

Matthew Blakey is a researcher and writer specializing in public policy, economics, and regulatory systems. His work has appeared in outlets such as the Foundation for Economic Education and RealClearMarkets.