Stock Prices and the Doctor Supply: Effect of Medicare Residency Policy on Healthcare Industry Firms

Abstract

Funding for medical residencies has been capped by US Congress since the late 1997, and has resultantly become an increasingly limiting factor of the doctor supply in the US. The resulting impact of Medicare residency policy on managed care firms, especially private insurers has been unclear. Using equity price data for healthcare firms listed in the S&P Health Index, I use the surprise introduction of the Resident Physician Shortage Reduction Act of 2009 and its proposed amendment to a major healthcare overhaul bill, to evaluate the market's assessment of expanded medical residency programs on the healthcare industry. Using tight three-day event study periods to look at when the bill was unexpectedly introduced in Congress and amended to the overhaul bill, I find Cumulative Average Abnormal Returns for Managed Care Firms of 10.9% and 4.2%, respectively, corresponding to an increase in total market value of approximately $5.5 billion and $2 billion. I also find that roughly 27% of the cost of the bill is passed on to firms while the remaining 73% is either passed on to consumers or lost to static inefficiencies.