[Editor's Comment: Today we have a republished post written by Physician on FIRE, a member of The White Coat Investor Network.
This post is about one of the most important financial decisions a physician will make — where to practice medicine. The original post ran here, but if you missed it the first time, it’s new to you! ]
In many professions, there seems to be a direct correlation between the cost of living and the salary potential. For those in finance, real estate, and law, the biggest salaries tend to be achievable in the highest cost-of-living cities.
If you want to make big money, you’ve got to head to the big city. New York, Boston, Miami, Chicago, Los Angeles, San Francisco. Places where $1 million dollars may or may not get you three bedrooms and two baths.
With some success and perhaps luck, the salary differential may be more than enough to make up for the increased costs associated with these large cities.
Arbitrage, the practice of taking advantage of different prices in different markets, is a strategy that can be employed in personal finance. There’s tax arbitrage, dividend arbitrage, and apparently a Richard Gere movie called Arbitrage. I’d like to discuss a different type of arbitrage today, geographic arbitrage.
What is Geographic Arbitrage (a.k.a. Geoarbitrage)?
Those of us practicing medicine are subject to a fairly unique pay structure. We’re needed everywhere, not just at corporate headquarters. Supply and demand goes a long way in determining our salaries.
Apparently, many of us prefer to live in larger cities, which creates a larger physician supply and lower demand for our services, driving down the salary potential. Fortunately, some physicians would rather be surrounded by farmland and feedlots rather than freeways. For this, they are rewarded handsomely.
Using Doximity’s Salary Map, we get a nice overview of nationwide salaries on a county-by-county basis. The heat map for my specialty, anesthesiology, looks like this. The purple counties represent an average salary in the $350,000 range, whereas the deep red counties exceed $410,000.
anesthesiologist pay
You’ll notice quite a few gaps on the map, particularly in the sparsely populated areas of the Great Plains. Let’s dial up the heat map for a more common specialty, family medicine.
family medicine pay
The blanks have largely been filled in with a deep shade of red, confirming that there is a distinct increase in salary to those who are willing and able to live in more rural areas of our great nation. The discrepancy isn’t huge, but the range is from about $210,000 to over $250,000.
How is the outlook for our general surgery colleagues? The heat map looks strikingly similar, with a range starting around $330,000 to better than $380,000.
general surgeon pay
What about cost of living?
It’s helpful to know that you can earn 15% to 20% more by living in middle America. Salary is only one component that helps determine your ability to boost your savings rate; expenses are another key factor. Where do you suppose it costs more to live? I think we already know the answer, but I heart numbers, so let’s dive into some real data.
According to Doximity, a general surgeon in New York City can expect to earn about $333,000. Meanwhile, his pheasant hunting counterpart in Sioux Falls, South Dakota will pull down better than $383,000, a difference of $50,000.
The internet is not suffering from a lack of cost of living calculators. We’ll look at a couple results to compare the cost of living in Manhattan to Sioux Falls.
According to CNN Money, a surgeon earning $330,000 in New York would need to earn $137,232 to live with similar spending habits in Sioux Falls. Conversely, the physician in Sioux Falls earning $380,000 in Sioux Falls would require $913,781 in Manhattan to enjoy the same level of spending there.
Sperling’s Best Places is apparently using a different data set, but comes to a similar, if not quite as striking conclusion, probably because the comparison was for New York City, but not Manhattan specifically. The conclusion is that New York is 76% more expensive, and a salary of $670,588 in NYC would be the equivalent of $380,000 in Sioux Falls.
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Is it all about the money?
Clearly, compensation and your ability to save are very important to your financial well-being, but they are not the only considerations in your overall well-being. Other factors need to be considered, and may very well carry more weight.
Proximity to family is vital for many, particularly if you have plans to start a family of your own. Familiarity and friends may be high on the priority list as well.
Some subspecialists are going to be geographically limited. Laramie, Wyoming probably doesn’t need multiple pediatric neurologists. They might be lucky to have one that travels to see patients in town once or twice a month.
Academic medicine can only be practiced in academic centers. North Platte, Nebraska has none, although they do have the world’s largest rail yard.
Then of course, there is the need for culture / restaurants / museums / shopping / diversity / professional sports teams, etc… If you have a burning desire to be surrounded by them all day every day, a medium or large city might be the only place you can be happy.
If, on the other hand, you can live with limited access to these things some of the time, with the ability to travel to the big cities at other times, you might find you can be happy in places you might have never dreamed of considering.
Living in middle America, with an extra $50,000 a year in salary, and drastically lower living expenses, you can have a very generous travel budget.
When you live in a small town like I do, your commute doesn’t have a rush hour, and may not even involve an automobile. I ride a e-bicycle to work when the weather allows, and there’s no place around town I can’t be in about 20 minutes on a bike. More exercise for me, less wear and tear on the car, and more money in my pocket.
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Small town living isn’t for everyone; my wife and I both grew up in small towns, so it suits us well. I’m not trying to convince you to move to the cornfields of western Iowa or the mountains of Montana. As I often do, I’m simply presenting a less ordinary way to live, and the advantages that of doing so.
Geographic arbitrage, with a beautiful combination of a higher salary and lower cost of living, has worked very well for us.
Do you take advantage of geographic arbitrage? Could you see yourself living in middle America or another low-cost of living part of the nation (or world?) Why or why not? Comment below!
Excellent advice! I was lucky to grow up in East Central Florida, near the space center. It is surprisingly underserved medically in many areas and I came back home to practice pulmonary medicine in the 1980s. My practice was busy from day one and never slowed. The quality of medicine was good and the quality of life excellent. We could afford a waterfront home without financial stress within a couple of years of starting.
I have many colleagues practicing in South Florida and other metropolitan locales who have not been so fortunate. They often go to multiple hospitals, make less income, and have a much more expensive standard of living (for the same quality of life that I have). Our differences in the ability to acquire wealth are large.
It’s not just the midwest that is like this. There are many more rural communities all over the country where there is opportunity.
Great point, Steven. There is arbitrage to be found in many places and facets of life. You were smart (and like me, lucky) to grow up in a place that offered such an opportunity.
Cheers!
-PoF
Good article. Another consideration is religion/ethnic community. There aren’t thriving Jewish communities in most of small town America. We ended up in a medium sized city with much better COL than NYC.
Glad to hear you found an affordable place to live that meets your needs. And you’re right — there are not a lot of synagogues where I live in rural Minnesota.
Best,
-PoF
Another issue for many docs, frankly, is dealing with racism/religious intolerance in certain communities. Look what happened to this poor fellow: http://voiceofasiaonline.com/community/sikh-doctor-in-us-files-religious-discrimination-lawsuit/
Sadly, these issues are real and terrible in many areas. No wonder some of them remain underserved….
Yea, I’ve been amazed how many patients out there refuse to get treated by a female/wrong skin color doctor. But the bigger complaint I hear is that they just can’t understand the doc due to the accent. Whether there’s underlying racism or not, that’s the complaint.
I don’t think female or African-American doctors speak with any different an accent. And clearly that wasn’t the issue in the article linked above.
Didn’t read the article. I’m not sure I communicated effectively if what you got out of my comment was that I thought females had an accent.
One factor may be hearing loss with the elderly- I’m not elderly but have SSNHL and since then it is 10x harder to understand people with accents. So if I have an older patient who requests not to see an FMG, this may be in play.
Kind of a “no brainier”, but the same conditions exist in dentistry. I could have retired from my small town practice in my early fifties, but waited until around sixty to add icing to the cake. A greater problem for small town practitioners is the dissolution of a small town practice. Due to lesser demand, it is usually harder to sell at the end of a career. If you really care about patients and staff, it’s really hard to lock the doors and walk away. But this is the reality in the majority of rural practices.
True!
My Dad and Granddad were both dentists in a small town. Fortunately, my dad and his dental partner were able to find someone to take over the practice as they were slowly transitioning out. Now, they’re enjoying their retirement with some extra income from the sale of the practice.
Cheers!
-PoF
This is very interesting. As I’ve been doing a lot of geography-related posts regarding debt, median housing process etc, I’ve noticed the Midwest to be ahead in almost all measures. Particularly the Upper Midwest. Fascinating to see it’s the same for Doc salaries.
We also rank really well for coldest nights and most alcohol consumed. Correlation isn’t necessarily causation, but in this case, maybe…
Skål
-PoF
The spread of “average wage” in psychiatry on the Doximity map is not very large: roughly $230,000 to $250,000.
For wages, the difference is inpatient versus outpatient, call versus not, weekends vs not, employer desperation, and medical director duties. The biggest determinant of my top few percent wages in psychiatry is “extra work”.
Currently, I am the benefactor of a $35,000 salary bump based on “employer desperation” and make an additional $170,000 a year from moonlighting two weekends a month and taking paid inpatient call three nights a week.
These two factors push my wage from the psychiatry average closer to the average for anesthesia or radiology for working an extra 4 days a month. That is about 50 extra days of work per year.
State tax in MI is 4.25 and NC (where we are moving) is now 5.49, but property taxes are lower in NC as is car insurance.
That’s a nice bump!
How will your salary compare in NC versus MI?
Psychiatry wages in NC are not as high as the Midwest. The NC job descriptions vary widely based on the factors I noted, from $220,000 to $275,000.
The Doximity map runs $220,000 to $240,000 suggesting lower psychiatry wages in NC by a notable amount.
It would be a challenge to replace my current wage anywhere in the country. Both of my income streams are from work no one else wants. There is also a shortage of psychiatrists in Michigan and a lot of desperate employers.
Luckily, my bills go down markedly in NC assuming I can sell my MI home and pay off the retirement home in NC. Property taxes are reduced by 60% to $2400 a year, electric bill is cut in half, no lawn care, no snow removal, no water bill, no HOA dues, no mortgage, and lower auto insurance. These equal a $50,000 a year reduction.
This article also applies to folks like myself who work remotely. My salary is more or less fixed, but the geographic differences in cost of living have made me a prince or a pauper as I’ve moved from place to place chasing my (now) wife.
Excellent article, excellent data at doximity! Thank you!
If you can work remotely, the arbitrage opportunities are so much greater. Depending on the type of job, you may not even be limited to the US.
Central America, Southeast Asia, Eastern Europe… lots of places with good quality of life and very low cost of living.
Cheers!
-PoF
While I agree with the premise, for some specialities a major disadvantage to a rural or small town practice is going to be a likely onerous call schedule and challenge to get coverage help in order to even take a vacation. For things like anesthesia and EM, any given small community hospital will probably have a critical mass of providers, but perhaps only 1 or 2 general surgeons, nephrologists, pulmonologists, etc. That might be tolerable in your 30s and early 40s, but not so much later on. I guess you can at least become FI quickly…
Excellent point.
Same reason all the physician-oriented blogs seem to be anesthesiologists, emergency medicine docs or radiologists: Shift work. Or (ostensibly) retired, in the case of Hatton1.
True. My first two jobs, I took call every third night on average. I’m now in my biggest group (5 docs) with a more tolerable call schedule.
There is more money to be made in the bigger groups in the metro (or surrounding suburbs) where the payor mix tends to be better, though, compared to the rural areas I prefer.
Cheers!
-PoF
Lots of call. I’m a radiologist, and I am on call q-2 for every LP, center line, and you name it in a small town in the Great Plains. Some of these small hospitals have a great medical staff. Others seem to be a refuge for the unemployable. I think the DUI rate of docs at my current hospital is bordering on 50%. Currently looking for that nice small town in the northern fly over country with a good medical community 🙂
Why are radiologists doing a large number of LPs and central lines? Shouldn’t a radiologist performed LP be very rare? Shouldn’t a PICC nurse be doing PICCS instead of a radiologist doing a central line? I didn’t even know radiologists ever did central lines.
Yes, every PICC, para, thora, and more. This is common for specialists in small hospitals up here. Largely driven by heavy reliance on mid levels and some sub optimally trained docs. Look out for this if you are considering this situation.
Geographic arbitrage was probably the biggest factor (although I didn’t even know it at the time that I was doing it) when to jump starting my path to FI.
I went from Ohio which had state income tax and local city income tax (had to pay 2 since I worked in one and lived in another) to moving to a state with no income tax at all. At my salary level the taxes alone from this move approach 80-90k/yr if not more.
I also have a lower property tax because of it. I did get hit with a high sales tax but since I don’t buy many things in a given year I come out way ahead (I believe I did a mental calculation before and just to make up for the income tax savings I would have to buy over a million dollars/yr in merchandise)
Wow! I’m in a very high-tax state in one of the higher paid specialties, and I’ve never paid more than about $30,000 in state income tax. Maybe I should have stuck with radiology (which appealed to me at one point).
Alas, no regrets, but tax arbitrage is another way to tilt the scales in your favor.
Cheers!
-PoF
What actually accounts for the difference in salary? Is it the hospital paying you to entice you to live there (employed position or stipend?) Is it better contracts from the insurance companies? I cannot imagine that the payor mix is that much better in rural america. I currently live in a small to medium size city several hours from the HCOL area, and suffer from 65-70% of my patients having medicare and medicaid. The hospital helps out a little, which brings us up to 25%-ile MGMA. But it is a desirable place to live in other ways so clearly the hospital can get away with us making so little.
In some instances, it is a good payor mix — Minnesota has a high concentration of Fortune 500 companies, for example, but a lot of it comes down to supply and demand. There are more physicians and their spouses interested in living in large, coastal cities than there are willing to live in South Dakota. The hospitals and patients still need to be able to support the higher salaries, but industries like agriculture can pay quite well.
Best,
-PoF
A big part of geographic arbitrage is picking cities/metropolitan areas that straddle state lines like Kansas City KS/MO , Buffalo NY/Cleveland OH, or Portland, OR/VancouverWA. Example: the government reimbursements suck for the VancoverWA physician but no income tax. Cross a river into Oregon: 7.9 % income tax, same level of property tax, same level of reimbursement. Since so many physician marraiges these days are to another physician met in residency or med school, the cross-border locations are often the best balance between specialty/taxes/reimbursement/commute. YMMV.
But that commute between Vancouver and Portland… https://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/
For those in the Midwest, they have it great financially as you pointed out nicely. But never pick your location based on the money, pick it on the factors that will make you happy. If you like to ski, you will end up spending all that extra money to get to a ski resort to do what you like. Life would have been better to live by the slopes in the first place. If your family lives in California, and you want to see them a lot, then you will be happier living near them. How close is near enough though? Pick a place that will boost your happiness factor and the money will be enough.
Dr. Cory S. Fawcett
Prescription for Financial Success
True. If you make every sacrifice to find the highest paying job, you’ll probably be miserable.
We do have skiing over here though — some of the best cross country skiiing and a gal named Lindsay Vonn learned to ski on little Buck Hill (http://www.sportsfeelgoodstories.com/buck-hill-the-little-hill-that-launched-a-legend/).
Family is a major consideration. My first full-time job was near my wife’s family. My current job is close to mine.
Cheers!
-PoF
Hey POF and WCI, quit telling everyone our secret! I love the fact I work less, get paid more, and spend significantly less on Cost of living than those on the coast who constantly ask me how I can live on such a place as the Midwest?
In fact, geographic arbitrage has allowed me to break all three of the WCI cardinal rules (bought the McMansion, Not 1 but 2 boats, and then the worst of all, bought a plane) all while still saving just shy of 30% of my pre tax income.
So I for the life of me can’t figure out why in the world you’d want to live in a city or expensive coast.
But then again it is about a 30 minute drive to get good Chinese takeout. So there is that. And we have mosquitos.
Yes, we do have mosquitos, don’t we? I’m on my first boat, but we do have the second home (we like to call them cabins) and plans to build a grander one on some 7 acres of lakefront we bought last year (https://www.physicianonfire.com/lakefront/).
I’ll stop singing the praises of the upper midwest, now. Boy, those mosquitos sure are bad this year, right? 😉
Skål!
-PoF
I keep trying to think of a place not too hot, with low humidity and no mosquitoes!
As a lawyer, have to say, the ability of doctors to live basically wherever they want to live–and to get paid more to live in areas with lower cost of living–is probably my biggest piece of envy. I fantasize about moving to one of the Houston law firms, but even that isn’t nearly as good as being able to practice in the midwest (outside of Chicago)/Great Plains.
Probably my second biggest piece of envy is your ability to make full-paid extra amounts on weekends, etc., if you decide you want to put the elbow grease in. We’re just expected to be available 24/7, and often are working 24/7, but no moonlighting allowed;)
Yeah, this arrangement seems to be fairly unique to healthcare. Big law pays best in big cities, where the cost of living tends to be higher (although Houston’s not so expensive).
I’ve put in all the extra time I care to work, but I was glad to have that option when I was young and hungry. Taking extra shifts and call helped put me in a good financial position.
Cheers!
-PoF
My piece of law envy is you get to charge by the minute for all the 24/7 business you speak of. But when I get dragged to a deposition next week I’ll be donating my time with zero reimbursement while the lawyer sitting next to me rakes it in.
The general concept here is fine. The problem is that it is not “arbitrage” by any meaningful definition. I can’t even think of a half decent way to twist the concept of arbitrage and have this concept fit into it
I’d think that a website related to personal finance and such would care about accuracy in instances such as these. But I realize that’s not the case as that’s what everyone seems to want to call it. It’s still wrong, though.
Arbitrage:
“the simultaneous buying and selling of securities, currency, or commodities (and SERVICES in this example) in different markets or in order to take advantage of differing prices for the same asset”
Actually this seems like a pretty good use of the term, especially when you consider that a physician services are in many ways a commodity
That’s a correct definition. Now read it. There are two elements:
1. Buying AND Selling
2. The same asset
The physician in this case is not buying AND selling the same asset. I guess he is selling physician services and buying living expenses or something like that.
Here’s what arbitrage is:
Let’s say there are stores in different cities that sell watches. Store A sells them Sells them for 2x of Store B. If you just go to Store B and keep the watch, then you didn’t perform arbitrage. All you did is go to the place with a better deal. And that’s really all that’s happening in this case. The physician is just going to a place with a better deal (i.e, higher income and lower cost of living).
Arbitrage would require going to store B, buying the watch for $X AND then selling that watch to store A for $1.5X (who presumably would turn around and sell it for $2X) . Nothing like that is happening in the case described.
The asset is time.
He’s selling some .
He gets more back by living in City B than in City A.
I work for a company in City A, but I live in City B.
My coworkers give up the same amount of time, but will have to work years longer because they live in a more expensive city.
I can sell my time for more in City A and I can buy time for less in City B.
It’s a little tough to decode exactly what you’re talking about. But here is the best I could extract from that:
Work for company in City A and live in City B could definitely qualify. I’d definitely need to hear more details about the specific example. That is also decidedly not what the article is talking about. If the article talked about living in the midwest and simultaneously working on the coasts (that would be a long commute – but not unheard of), or vice versa, that would fit your example. The author is clearly talking about both living and working in the midwest as opposed to big HCOL cities.
Furthermore in the article, City A (to use your term) happens to have both lower cost of living and higher wages. It has both advantages. In your example City A has one advantage and City B has another advantage. That’s totally different and doesn’t apply to the content of the article.
So the bottom line is that you are posting an example that sounds like it might involve arbitrage, but that example is clearly different from what was discussed in the article.
What word would you use instead?
Why does it have to be one word?
All right, I’ll give you 7 syllables in as many words as you want. 🙂
9 syllables isn’t too bad. And at least it’s not inaccurate.
Here’s one thought : Call it “income/cost of living mismatch”.
That’s actually what it is. In lots of fields income and cost of living are positively correlated or matched. In medicine they’re negatively correlated or mismatched.
Your argument is ridiculous and trolling. Move along.
Using the correct terminology is trolling? That’s new to me.
Arbitrage is simply taking advantage of price differences in different markets. This is that. Agree with PTM, and at the very least (and most pedantic) it’s still an excellent analogy.
My dream of living in a cabin in the backwoods of Montana with an excellent internet connection remains intact.
“Arbitrage is simply taking advantage of price differences in different markets.”
That’s not quite right. Refer to definition posted above by PTM who you agree with.
Was it you who gave me a hard time about using “arbitrage” to describe getting a 39.6% tax break on 401(k) contributions and then paying 0%, 10%, 15% etc on withdrawals too? If so I think you have an overly narrow definition of the word. Technically correct, perhaps, but unless you have a better word to describe situations like these, I suspect lots of people will continue to use it this way because it makes intuitive sense.
That wasn’t me (at least I don’t think it was). But based on your brief description, that is a far better use than what is here.
I think of arbitrage as taking advantage of differing valuations of the same asset in different markets. That may not fit the strictest definition, since I’m not buying it in one place and selling it elsewhere, but I am profiting from the differences in a way.
“Geographic arbitrage” takes advantage of both the varied valuations of physician work in different places and the variance in valuations of things like homes, gasoline, and other factors that contribute to cost of living. Economists may not like the use of the term “arbitrage” in this instance, but I don’t know of a better word to take its place.
Best,
-PoF
Exactly. If someone can teach us a better word/phrase to describe this strategy, I’ll gladly use it. Until then, it’s geographic arbitrage!
I realize I’m not going to convince anybody, because I guess “geographic arbitrage” just sounds like a fun term to say. But what you’re describing is just not arbitrage.
You say, “I think of arbitrage as taking advantage of differing valuations of the same asset in different markets. ”
However, that’s only a small part of it. For example imagine the same quality steak costs $20/lb at Whole Foods but $10/lb at Costco. We now have different valuations of the same thing in different markets. If I buy steak at Costco am I performing arbitrage? After all I’m am “taking advantage of differing valuations of the same asset in different markets”
I’m sure you’ve got some reason why that’s not arbitrage, because it obviously isn’t. So, let’s take it one step further. I’m a cashier and I discover costco pays better than whole foods. So now I’ll go work at Costco so I can get paid more and I’ll easily be able to buy cheaper steak. Surely, that’s got to be arbitrage of some sort in your book.
It’s not even really debatable that what you’re describing isn’t arbitrage. I can’t really argue with “Well, I can’t think of what else to call it so I’m going to use this other term that has some vaguely similar elements”. I’d recommend just calling it what it is, even if you have to use more words.
This term “geographic arbitrage” is becoming more and more used in the FI community. Googling it brings up 3 or 4 articles already. While it might not be in the dictionary yet, it may soon be. And guess what it’s definition will be?
I’m not sure what you’re reading.
When I looked, the first hit I saw was the POF article. There are a couple of others like it that are specific to physicians. Those usages are completely wrong.
There are other articles not specific to physicians, like this one:
https://www.madfientist.com/early-retirement-preview/
This was the second hit in my google search (also relevant to the FI community) and is both different from what POF is describing and actually is arbitrage. He is talking about working remotely getting paid in one currency and then living in an entirely different place that’s cheaper with a different currency. Surely, you can see how that is substantially different from what POF is talking about. I guess I can explain further if you require it.
So, my hope is that if it gets in the dictionary, the definition will be the correct one. But it may not be. The good guys don’t always win. Sometimes through repeated misuse a word can achieve a meaning that was once clearly wrong.
There are plenty of examples of this: “irregardless” is actually a word in some dictionaries. And in the OED, I believe that one acceptable definition of “literally” is figuratively. So, I guess the term arbitrage could become corrupted. I’ll still keep trying to fight the good fight.
“Geographic arbitrage is the practice of taking advantage of different prices in different markets. This could be applied to tax, dividend, rent, living costs, etc.”
Read more: http://www.fromcentstoretirement.com/geographic-arbitrage/#ixzz5HMEu2uuo
Do you not read the links that you refer to?
What this guy is talking about is completely different from POF. This guy actually is engaging in a type of arbitrage between Germany and Portugal. Do you not see how that is completely different from POF’s article?
POF article: Live and work in the Midwest
Article you posted: Take advantage of COL gap by earning in Germany and investing in Portugal.
These are two completely different things. One is actually a form of arbitrage. One is just moving to place with a better deal.
How is this concept that hard to grasp?
Sure, I read the linked article. I don’t see much difference between selling a service in different states and different countries…taking advantage of different prices, taxes, costs of living…like the person in the article.
Sounds similar to me. You must be an attorney.
So, why isn’t this arbitrage:
For example imagine the same quality steak costs $20/lb at Whole Foods but $10/lb at Costco. We now have different valuations of the same thing in different markets. If I buy steak at Costco am I performing arbitrage? After all I’m am “taking advantage of differing valuations of the same asset in different markets”
I mean, it “sounds similar to me”. Let’s call it grocery arbitrage.
Poeple create and then sell skills in service businesses. In most cases it’s a skill set. They sell it in economically favorable or unfavorable environments. It is to one’s advantage to sell the service in the best market, also taking advantage of lower living costs, lower taxes, and higher wages for the same service if possible.
By definition arbitrage is “the nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies”.
In this definition, AR may be correct as to fit. I have seen other definitions of arbitrage that fit this blog post a bit better.
I like to call the use of location, market factors, tax and cost of living differences “Domestic Geoarbitrage” and moving to a country with a lower cost of living in retirement “Global Geoarbitrage.”
Did you fight inflammable vs flammable too?
I think that was before my time. You have a link on the history of that one?
No, I’ve just always thought it was funny that they meant the same thing. Kind of like famous and infamous that way.
At any rate, I concede the point that “arbitrage” is not being used in the technically correct manner. However, I think a new term, geographic arbitrage” is being invented as we watch. It would be a little better if someone was earning in the Bay Area and spending in the Midwest rather than just moving to the Midwest.
You’re still wrong. It’s not being invented. It has a meaning and is mostly used correctly. When I did that google search you did, all non-physician authors writing about financial independence are using the term “Geographic arbitrage” to actually describe a form of arbitrage. There is activity in two distinct markets in different geographic areas, and the differential is taken advantage of. So, if we assume that most people in the FI community are not docs, the vast majority of them are using the term correctly. It’s already invented and in use.
In POF’s article and another physician written one I saw, it’s just talking about moving somewhere where salaries are higher and COL is lower. There is no second market involved. You can imagine you’re saving money over living in New York, but what actually happens in New York has no effect on your bottom line as it would someone who was involved in any sort of real arbitrage involving NY and the midwest.
As far as you final example is concerned, that’s actually a real thing. I think someone posted a link somewhere on this site about an NP or nurse who works in the Bay Area but actually lives with his family in Pennsylvania. That would actually count. That’s, of course, not what POF is talking about.
I love controversy. We’re up to 67 comments on a Saturday post. That’s probably a record.
I’ve gotta admit it though, I didn’t see this controversy coming.
I did a little searching, and the first mention I can find of the term ‘geographic arbitrage’ is from an author Rich Karlgaard in a book called Life 2.0 published in 2004. One can argue what is considered to be correct use of the term, but it wasn’t recently made up by PoF. Physicians butcher the Latin and Greek languages on a daily basis. Why not English as well? This is just a sign that the English language is still alive.
POF,
One thing I’m curious about is the nature of the income discrepancy that you discovered. I haven’t researched it myself, but I’m curious if you came across anything to address this particular issue.
I absolutely living in ND, for example will have a lower cost of living than Manhattan. What I’m less convinced of is whether income in ND is higher than on a per unit basis. My theory is that a large reason (but not only one) why the salary for a surgeon, for example, is higher in ND, is because there is a higher volume of work there. There are fewer surgeons to compete with in ND, so each surgeon can do more surgery and thus make more income.
My basis for this belief is that if we look at medicare fee schedule and insurance reimbursement for example, you see that the same CPT codes are reimbursed at much higher rates in large, expensive urban areas than they are in the middle of ND. So for each unit of work done, there is more money coming in. However, in Manhattan, overhead will obviously be higher. But even after overhead is accounted for, I would expect that the Manhattan surgeon (in absolute terms) could very easily make a little more money on a per surgery basis than a ND surgeon. But most ND surgeons will make more than most Manhattan surgeons because they can do a lot more surgery.
If that is true, then it’s a little inaccurate to say that the ND surgeon’s salary is higher. On the one hand it is true that he is getting more money, but on the other hand he is doing more surgery. So on an income per surgery basis, his income is actually lower.
Bear in mind, I have no idea if this is actually true. I’m just curious if you came across any data that supports or refutes this notion.
The difference in physician wages from state to state depends on many factors:
Supply and demand (few want to live in some places)
The “livability” and amenities of the location
Payor mix/Medicaid penetration
Local cost of living
Specialty specific issues
Differences in taxation
So, for example:
You get paid more to work in Traverse City Michigan as it is colder there and far from the cities, but it is full of affluent retirees. They have some trouble getting doctors. It costs more to live there in a nice house on a lake. No local taxes.
You get paid more to work in Flint, MI as no one wants to live there. The housing is cheap, but the patient population has more substance abuse, fewer are employed, lots of disability, higher crime rate, poor schools reputation, etc. There is a 1% income tax for residents.
For years some Florida coastal locations paid poorly as there were many doctors who wanted to live there. Same is true for Asheville, NC.
I don’t really disagree with any of the above but one common factor of all of those undesirable places is that docs don’t want to live there. So there is more work for the docs that do. It could be that these docs are paid more simply because they are able to just walk in and perform a high volume of work without the work required to establish a practice. They are also easily able to maintain is as they have little competition.
I was just curious if POF was able to determine the extent of this effect.
I absolutely think that more work is the reason for the income/salary discrepancy.
Most of the docs I know around here don’t have a “can you fill my schedule” problem, it’s usually a “can you work an extra day these patients are upset your scheduling so far out” problem. I don’t think reimbursement rates has much to do with it at all.
In my field, it’s virtually 100% of the discrepancy as well.
It would be tough to quantify that, but I have no doubt it is easier to establish a practice in a medium sized city in Iowa than in Salt Lake City or Denver or New York City or wherever.
I work less and make more as fewer doctors want to live here.
I work 0830 to 1600 with an hour off for lunch to go swim at the YMCA. They can only schedule in these hours. They schedule 13-19 (depending on number of new patients) and 28% no show, so I see an average of 9-12 a day. I get paid an extra $35,000 or so as there are so few psychiatrists in the area.
I don’t do any more work…in fact I do less as I negotiated the lunch hour and the end time of 1600 (in order to go to my kid’s sports events).
I don’t think the doctors with the upside pay difference see more patients. They negotiated a better rate or there is a better prevailing rate due to the factors I mentioned above. The employer makes less money and has to make it up elsewhere.
I think part of the problem is that when people say “work less”, they could mean one of two things:
1. Work fewer hours
2. See fewer patients
And when people are describing their situations, it’s not always clear what they mean.
AR. Why do you visit this blog?. All you’re doing is arguing.
It’s clearly not only a volume thing with many in that lower COL area are on salary and are not expected to reach same RVU thresholds and cover much smaller hospitals with less volume.
Being the only surgeon in town eating what you kill is one thing. But why are you looking at it from single specialty.
What exactly did you think I was arguing about? You might want to try reading the post you’re responding to again.
I never said it was only a volume thing (once again please read). I just said it was a factor and asked POF if in his research he came across how much volume was responsible for the difference.
I did say it was about 100% in my specialty, but obviously I understand that other specialties can be different Did you really need me to explicitly state that?
In case you’re to lazy to scroll up, I literally ended my first post on this issue with, “Bear in mind, I have no idea if this is actually true. I’m just curious if you came across any data that supports or refutes this notion.”
That sure sounds argumentative to me.
It was probably more a continuation of the mood I was put in reading all the drivel about your petty definition of arbitrage all at once
I’ve been called many things in life but lazy is not one of them.
Your comments about the arbitrage definition ruined this blog post and discussion for me and I figured I’d say something.
I think AR is hilarious.
I mean, really, who cares if arbitrage is the exact right word?
I am specifically calling all such discussions as to using geographic places and differences in pay, taxes, cost of living, and such to optimize wealth as Geoarbitrage. I love the word.
@Seabass
FTR, I didn’t call you lazy.
But I admit I thought it was possible which is why I wrote what I did. It really looked like you decided to respond to my posts without actually reading them.
But I suppose your explanation makes sense. Anyway, sorry you didn’t care for the discussion on arbitrage. The great thing about this type of forum is that you can just scroll past the stuff you don’t like.
True.
Great forum.
Let’s get back to enjoying the blog. No hard feelings.
So, so hard for those of us with family in more expensive areas. So hard.
I come from a small town and would have no problem practicing in one. The only problem I foresee is schooling. After having lived in bigger cities, I see the opportunities afforded kids in the nearby suburb school districts and want my (future) kids to have those opportunities. Most of the top schools in my state are centered around a few bigger cities and there’s no shortage of physicians there.
Edit: I am fond of the new edit feature!
Is it true that rural hospital systems get a subsidy from CMS to allow the hosp to cater to the higher number of MCD/uninsured pts? Is this one of the reasons a rural hosp can afford to offer a higher salary and perks?
The rural hospital where I do my moonlighting (inpatient psychiatry weekends and some holidays) pays more because they have to. They have not added a weekend doctor to the schedule in 12 years.
They pay an average of $4000 a weekend (~ 6 hours of work both days) because they have to. On Memorial Day, I made $2000 for what took about four hours. Their unit is always mostly full, drawing from 100 miles in all directions due to the shortage of inpatient psychiatry beds in Michigan. It’s a flat rate, so if the census is low, no matter, it is a better hourly wage for me.
Almost no one can do the work or at least no one seems to want to, so good news for me: stalwart, able, and looking to retire early. Bad news for them that there are so few of us left, and they have to pay a market wage for a dwindling resource. As I have said, it’s about market forces. Their unit still makes money or they would shut it down.
Even if they pay more because they have to, where does the money come from? We know that what they are getting from the payers is less than what payers in large cities pay (definitely true for CMS and largely true for private payers, although there are exceptions in the latter group). So if less money is coming in for each CPT code used, how do docs in the midwest get more income out?
The only things I can think of are that the middlemen (i.e.,people running the hospitals) take less of a cut. Or that the overhead is disproportionately expensive in the larger city (obviously it’s more expensive, but it would have to be even more than expected). Could be a mix of the two. I guess if the subsidy thing is true, then that could explain it as well.
At this point, as far as where the money comes from, I’d rate the following in decreasing order of importance.
1. Volume of work
2. Middlemen take less of a cut
3. Disproportionately high overhead.
But I’m really just guessing and obviously it varies by specialty. I might look in to it more when I have some time.
@Sean
I’d be interested in if anyone can confirm if the CMS subsidy you’re talking about is true. I’ve never heard about it.
Here is a government link to a discussion of how inpatient psychiatry units (and some other types of units) are paid: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientPsychFacilPPS/index.html
When I ran an inpatient geriatric (almost all Medicare) psychiatry unit, the fee paid per admission was set by the hospital’s costs. So, if you tallied your costs, you got costs, plus a margin. There was no incentive to cut your costs. This resulted in a payment of about $11,000 to $14,000 per admission. For our unit with 360 admissions a year, this was 4 million to 5 million a year in revenue. After all expenses, on paper, the unit made about a million a year as a “contribution margin” to the overall campus which also housed rehab (another unit reimbursed in this way). When the rehab unit went out of business due to not having enough admits that met certain criteria set by the government, the hospital ramped up other services with better margins (orthopedics) on that campus.
One year, the government came in to do an audit to try to pay us differently. They used a lot of formulas to reduce the amount paid per admit from about $12,000 down to $9000. Now the unit only made a half a million “profit” on 3.25 million in revenue. You can see how my average salary of $250,000 could get lost in the mix with the six nurses, several mental health techs, a ward clerk, a nurse manager, as well as parts of OT and PT staff shared with rehab or ortho. I don’t know how it all shook out, but I only billed out about $250,000 to 300,000 a year in services and they usually collected about 50% to 60% of this (say $150,000). Having me there (a necessity) cost them about $150,000 a year in salary and benefit costs that were not paid for directly by my service provision. I just assumed since they were making a half a million to a million in “profit” after all expenses that I was part of the cost of that business.
Now, they would have made money on ancillary services, lab services, CT scans, MRI’s, and such. The internal medicine doctors only got what they billed and collected on their consults. They were not salaried.
I’m not sure if they got paid “extra” for doing MRI and such as I remember them NOT wanting us to do PET scans on patients as it reduced profits.
I’m not an accountant or hospital administrator, but I did get flowsheets as the Medical Director and it always showed about $500,000 to 1.25 million in the positive each year despite the lower amount per admit. I was told this number was $20,000 per admission prior to 2001, and had gone down to $14,000 then about $11,000 and finally down to $9000 by 2011 after the reconstructed payment scheme by the government.
I think payor mix is the #1 reason for the difference in pay.
https://blog.definitivehc.com/top-hospitals-by-medicaid-and-medicare-payor-mix
The MGMA study states that medical practices with a higher NPP-to-physician ratio earn more in net revenue than those with lower ratios while also reporting greater productivity. The study compared more than 2,900 provider organizations and over 40 practice types.
Another key point from the survey stated that primary care practices with lower percentages of government payor mixes, like Medicaid and Medicare, were more likely to have both higher operating costs and greater revenue. On average, practices with a payor mix of less than 30 percent yielded more than $159,000 more in revenue per physician than those with a mix of 50 percent or more. That number jumps to $221,000 for hospital-owned practices.
@Don
If that’s true, what is the theory on how geography influences payor mix? Many of the ones on the lower medicare % list are in large urban areas (and happen to be children’s hospitals, so there is obviously some confounding going on.
Payor mix is one part of the puzzle but explains nothing about my wages. The two locations where I work are essentially ALL Medicaid or Medicare/Medicaid. At the outpatient site the patients are ALL in case management.
The facility that pays me an above market wage makes its money with case management services. All the case managers are required to do four hours of direct contact with patients (16 quarter hour contacts) per day. Imagine having over a dozen case managers for 600 patients, each case manager having 50 patients.
Now multiply 16 billable contacts per day times these 12 case managers. That’s about 200 billable fifteen minute chunks per day, or 1000 appointments a week.
So my 50 appointments seen per week represent five percent of the weekly billables. I am not the driver of the profits. They cover part of my cost with my billables, but not all of it. With the 0.4 FTE NP seeing her own patients, we both add up to about 7% of billable contacts.
So if the money machine is the case managers, what difference does it make if they pay me an extra $30,000 due to market factors (few psychiatrists that can do or want to do this work).
Many places make their money from psychiatrists on their other billable services, not on direct service provision by the psychiatrist.
I feel I’m qualified to say this as I spent a brief period at the begining of my career practicing in a rural area in the southeast, but there is a really big practical problem with this idea: The growing urban-rural cultural chasm (reflected not just in our politics but in all kinds of socioeconomic metrics) is going to make it increasingly problematic to retain highly-educated professionals (many of who either come from or at least spent time training in urban center) in rural areas. I felt like a Martian in the country, and it was part of the reason why my wife and I left. Going to church was the #1 social activity, which made listening to casually rascist comments all the more grating. Not saying all rural areas are like this, but plenty are. You’d have to pay me much more than a 10% bonus to go back – it just wouldn’t be worth it (a testament to making good financial decisions so I don’t have to chase money but can instead do what I want).
Also, I suspect that one big reason for the rural/urban pay discrepancy is that when there is scarcity in the supply of providers, the providers that do work in underserved areas have a lot of work to do. So what the data reflects is a fairly linear work-to-pay relationship that isn’t governed by location so much as volume. Then what’s the sense in making $30k more when you feel like you can’t ever take a vacation?
That’s interesting.
There appears to be an hypothesis in a few of the posts that rural areas or other higher paying areas make up the difference for the higher pay by providing jobs that are volume heavy and work the doctor with more than average vigor.
I think that in some markets, the doctor writes their own ticket: higher pay, MORE vacation time, easier schedule, better benefits, etc.
The factors that others have shared with me that contributed to higher than average pay in the first fifteen years of my career were taking call, working weekends, being a Medical Director, and having some inpatient work. For the last ten years, it seems primarily driven by a shortage of psychiatrist availability, such that I can get a fine wage with no call, no inpatient work, and no weekends.
Because of this shortage, I have been able to get a different job within an hour of my home in a few weeks at any time I have gone looking for better wages, schedules and benefits. We have never had to move and we have lived in the same home for 15 years while all my kids have gone to the same school.
Most recently, a change in venue produced a signing bonus, five more vacation days (total of 30 days with 11 additional holidays off), a week of paid CME time off, Blue Cross insurance, a 401K match, and an 0800 to 1600 work day with a “real lunch hour” off.
Clearly, pay and benefits vary widely as I mentioned by: region of the country, local market conditions, specialty specific factors, individual factors, and job specific factors (call, practice type and venue, weekends or not, etc.).
Rate of pay is market and specialty specific.
As I said I negotiated a 7 hour day with a real lunch hour.
I swam a half a mile at lunch today. I see 10 patients a day.
I get paid $300,000 a year because of a shortage of psychiatrists, my experience, my CV, and ability to do any work anyone asks. I also tend to do work no one else wants.
I understood the concept of arbitrage even when the technical definition did not apply. I worked for a large corporation that believed in paying a national wage for professional talent, so living in a low cost area is somewhat the same as this post indicates. I live in Jackson, TN. we have a massive health care presence and very few object to minorities being their care givers. We have no personal income tax, low property taxes and generally affordable housing. We also have several colleges and opportunities for various hobbies.