October 7, 2024

Today’s Economist: Uwe E. Reinhardt: The Debt of Medical Students

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In debates on health work force policy, it is frequently argued that medical education is a public good, because it benefits society as a whole.

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The implication is that tuition charges at medical schools should be zero or close to zero. Many nations in the industrialized world follow that policy, although they have also kept tuition low for most college students.

Most economists disagree with characterizing higher education as a public good. Only the individual receiving a professional education – including the M.D. degree — owns the human capital that the graduation documents certify to exist.

Medical graduates can use their human capital any way they wish. They can treat patients, do medical research or use their knowledge as business consultants to health-related companies or as financial analysts in the financial markets, as some of them do.

There may be some positive spillover for society as a whole from having this privately owned human capital produced, and these effects (called externalities by economists) might warrant some public subsidies toward the production of that human capital. That argument could be extended to many other forms of human capital, as well — e.g., engineers, scientists, nurses.

According to a fact sheet published by the American Association of Medical Colleges, annual tuition and fees at public medical schools in 2011-12 amounted to $30,753, and the total cost of attendance was $51,300. The comparable averages for private medical schools were $48,258 and $69,738. To most Americans, these will seem staggering amounts.

Which brings me to the sizable debt with which, almost uniquely in the world, American medical students now graduate. The association routinely collects data on these debts. A good summary of the most recent data, for 2010, can be found on the previously identified fact sheet, and I created this table from that source.

American Association of Medical Colleges

As the table shows, some of the students’ accumulated debt by time of graduation from medical school was incurred to finance a liberal arts undergraduate education. The $18,000 shown in the table is actually on the low side. According to the Project on Student Debt, college seniors who graduated in 2010 had an average debt of $25,250, with a range among campuses of $950 to $55,250 a student. Individual students at private colleges may have even larger debts. And debt collectors are doing a thriving business collecting these debts.

Amortization of the large debt accumulated by medical students will clearly take a bite of the income they will earn in medical practice. But at least there will be a sizable future income stream to absorb the hit. Many other college graduates have much smaller incomes or are in even direr straits.

The table below conveys a rough indication of what the amortization of medical-school debt might mean for individual students.

In this table I have assumed that the student modeled here had average debt of $161,300 upon graduation from medical school. From that debt I deducted $24,400, the amount to which $18,000 of debt upon graduation from a liberal arts college would grow in four years at a compound interest rate of 7.9 percent (that’s at the high end of the interest rate medical students are charged on debt). The remainder is debt related strictly to the medical education of the student.

I assume that after residency, the practicing physician has a starting net income (after practice costs) of $150,000 or $300,000, and that these incomes will grow at an annual compound growth rate of 3.5 percent over time. Physician incomes vary considerably across specialties and even within specialties.

To get a feel for the data, readers may want to look at several surveys of doctors’ pay.

According to the association’s fact sheet, students pay an interest rate of 6.8 percent on Stafford loans; for lower-income students, the rate is a subsidized 3.4 percent. For Direct Plus loans, students or their parents pay a rate of 7.9 percent, the rate I used in the table.

Finally, I assume two distinct amortization models. Under one, students pay back their debt with flat annual (or monthly) payments over 20 years. That payment is $13,840 a year. Under the alternative approach, the annual amortization payment rises in step with the assumed annual increase in physician income. The first annual payment in that approach is $10,659.

The data in the table represent these annual debt-amortization payments as a percentage of physician net income in years one, 10 and 20 of medical practice.

Clearly, these payments are a noticeable burden, even over 20 years. For amortization over 10 years, they would naturally be higher. On the other hand, the numbers would decline sharply with reductions in the interest rate charged. The table below illustrates the sensitivity of the first-year payment to interest rates and amortization horizon for the payment stream that increases in step with assumed increases in practice income.

The annual amortization payments would be particularly burdensome for primary care physicians, with their relatively lower incomes. That fact is a potential policy lever Congress might employ if it took seriously people’s lament that America is suffering from an acute shortage of primary care physicians.

I shall muse about that and other options in a future post.

Article source: http://economix.blogs.nytimes.com/2012/09/14/the-debt-of-medical-students/?partner=rss&emc=rss

DealBook: Activist Investors Take Stake in McGraw-Hill

Jana Partners, founded by Barry Rosenstein, announced a stake in McGraw-Hill.Daniel Acker/Bloomberg NewsJana Partners, founded by Barry Rosenstein, announced a stake in McGraw-Hill.

8:57 p.m. | Updated

Activist investors are escalating their fight for change at some American companies.

The latest — and biggest push so far this year — came on Monday, when the hedge fund Jana Partners, along with a Canadian pension plan, announced a combined 5.2 percent stake in McGraw-Hill. The investment could build pressure for a breakup of the conglomerate. Several analysts have argued for a corporate overhaul, saying that while the company’s Standard Poor’s ratings agency has produced double-digit growth in sales and profit, its book publishing business has flagged.

Jana’s aggressive move follows a flurry of prominent campaigns by investors in recent weeks. Carl C. Icahn, the longtime corporate raider, has bid for Clorox, trying to get it to sell itself. The giant hedge fund Citadel is pressing E*Trade to overhaul its board. Also on Monday, the private equity firm Sycamore Partners disclosed that it had accumulated a 9.9 percent stake in the struggling women’s retailer Talbots, saying that it expected to talk to management about its strategy and operations.

With a market value of about $12.5 billion, McGraw-Hill is the biggest target of activist investors so far this year, according to data from FactSet Research. And with its rich history of publishing educational books that touch students from kindergarten to professional education, it may also be the best known. Although Harold W. McGraw III, the company’s chairman and chief executive, owns less than 4 percent of the company, McGraw-Hill has long been seen as a family business.

Harold W. McGraw III, chief executive of McGraw-Hill.Jin Lee/Bloomberg NewsHarold W. McGraw III, chief executive of McGraw-Hill.

Founded by his great-grandfather, the company has been in the family for more than 100 years and has weathered a previous challenge. In 1979, the company, under Mr. McGraw’s father, was embroiled in a bruising battle with American Express.

According to the filing, Jana has already held discussions with the company about its “business, corporate structure, operations, management and board composition, strategy and future plans.” The filing adds that the hedge fund “expects to continue to have such discussions” and “may take other steps seeking to bring about changes to increase shareholder value.”

Activist investors typically buy up shares in a company hoping to unlock value by pressuring management to sell or spin off pieces, or by joining the board of directors to effect change. Styles range widely, from loud and highly public campaigns to more low-key, behind-the-scenes interaction with management.

In the case of Jana and McGraw-Hill, the talks have so far been cordial, said a person briefed on the conversations. They met about two weeks ago, and McGraw-Hill is considering all options, this person said. A second meeting was scheduled for next week with Jana and the Ontario Teachers’ Pension Plan, who are working together as well.

The most obvious option would be a break-up of some sort, analysts say. That could include spinning off the profitable financial services division, which includes Standard and Poor’s, from its flagging education business, which lost money last quarter.

Goldman Sachs analysts last month wrote that the sum of McGraw-Hill’s parts was worth more than current market value. The company was about 20 percent undervalued compared with its peers, the Goldman analysts said. Analysts at Piper Jaffray said that if McGraw-Hill spun off some businesses, its share price would be trading closer to $53 rather the low $40’s.

In a statement, McGraw-Hill said that it was “conducting a comprehensive portfolio review, which includes reevaluating its strategic core to ensure it is appropriately allocating capital to generate shareholder value. This process began in the second half of last year with the creation of McGraw-Hill Financial and is expected to continue with additional significant actions in 2011. This process is designed to unlock superior shareholder value and accelerate global growth.”

The investments by Jana and the Ontario teachers’ plan follow similar recent statements by McGraw-Hill that it was reviewing its portfolio. That process could be sped up or intensified with the company’s new major shareholders.

In June, McGraw-Hill put its television stations on the block, part of an effort to review its holdings and “ensure it is appropriately allocating capital to generate shareholder value.” The company also said it would be looking for ways to cut costs.

“There has been a strong response from financial and non-financial buyers to the announcement in June that we planned to divest our broadcasting group,” Mr. McGraw said in an earnings conference call last week. “That divestiture is part of a continuing portfolio review across the company to re-evaluate our strategic core.”

In late 2009, the company sold BusinessWeek to Bloomberg for $5 million.

McGraw Hill stock has climbed 13 percent this year, but remains well below its peak of nearly $71 in 2007, closing on Monday at $41.41. The shares jumped 5 percent in after-hours trading on Monday following the news of the investments by Jana and the Ontario teachers’ plan. Jana holds a 2.9 percent stake, while the pension fund owns 2.3 percent.

Founded by Barry Rosenstein in 2001, Jana has engaged in more than 40 campaigns against companies. It was part of a group led by Mr. Icahn that pushed Time Warner to sell AOL, a battle the activists lost, although the company later spun off the unit.

In late 2009, the hedge fund took a position in the Dutch mail company TNT N.V., and quietly worked with the company and pushed it to break into two parts.

But the hedge fund engaged in a public battle with CNet Networks to replace its board in 2008. Instead, the company was acquired by CBS.

Founded in 1888, McGraw Hill also owns J.D. Power and Platts, the news and information service.

Article source: http://feeds.nytimes.com/click.phdo?i=94947110f9f016bc8bdfb7a199320427