A committee of experts convened by the prestigious Institute of Medicine of the National Academy of Sciences recently wrestled with that question as well. In its report on graduate medical education, the committee did not buy into the proposition of the two economists on the panel. Yet at least it acknowledged them in passing in proposing ways to streamline continued government funding. (An excellent summary of the report by two of its editors was just published in The New England Journal of Medicine.)

A cap on government funding of graduate medical education, instituted as part of the Balanced Budget Act of 1997, is being fingered as the culprit behind what could become a serious shortage of physicians in this country. Even The Wall Street Journal, typically no fan of increased government spending, published some op-eds calling for increased government funding of graduate medical education.

The usual argument for public financing of a public good is that it can be shown that private markets would vastly undersupply such goods. Economists define public goods as those that are “nonrival” and “non-excludable.” Clean air and the security from external and internal national defense are classic examples. Such a good is “nonrival” in the sense that one person’s consumption of the good does not preclude other persons from consuming it. It is “non-excludable” because individuals cannot be excluded from using the good.

Medical education and training represents human capital that is fully owned by the trainees. They can deploy it as they wish — on patient care, or even in the financial markets, where quite a few physicians now work. In principle, therefore, the owners of that valuable, purely private human capital should pay themselves for its production. That physicians serve society can be acknowledged, but so do many other professions whose education is not publicly funded. Just because privately owned human capital serves the public does not make it a public good.

The proposition that residents reimburse teaching hospitals for the cost of their training rests on the assumption that, at the margin, residents — especially as they become more senior — add far greater revenue to teaching hospitals than they are paid in salary. The difference between that value added and the residents’ usually meager salaries is the reimbursement for the added costs teaching hospitals incur on residency training.