Physician income targets: new evidence on an old controversy

This study uses a unique set of data to identify the factors that affect physician income targets among a nationally representative sample of young (under age 40) physicians in 1987. The study reveals that income targets respond directly to actual income, but that this relationship is rather inelastic. Among self-employed physicians, for example, a 10% decline in actual income would reduce the target by only 3%. Thus, our study provides the first direct evidence to quantify how a decline in income will increase the divergence between actual and target income. Moreover, in quantifying this divergence, our results provide an upper bound on the dollar value of any demand inducement that may ensue. The results suggest that targets are set, at least in part, to compensate physicians for pecuniary and nonpecuniary costs associated with medical practice. Discrimination, dissatisfaction, financial risks, and training costs all appear to raise income targets. Physicians may desire higher incomes to compensate them for discrimination or other difficulties they have encountered in practicing medicine.