A few months ago a doctor asked me why hedge fund managers make more money than he and his colleagues. After all, Doctor, when used before a name, is capitalized, while hedge fund manager isn't. While I'm joking about the capitalization -- it does reflect the much greater level of societal acclamation doctors receive from the moment they set their minds on an MD to their obituaries. So why doesn't societal acclamation translate into money?
Before trying to answer this question, it's worth noting that I just spent some time trying to find a list of the highest paid doctors -- but I failed. I found one list which said surgeons make an average of $247,536-- and a 1999 survey suggesting that neuro-surgeons make $500,000. But hedge fund managers do get ranked by income, as this New York Times article (registration required) points out.
My post on top-ranked James Simons (2006 income: $1.7 billion), suggested hedge fund managers out-earn doctors because top performing hedgies can leverage their time more efficiently. That is -- while a hedge fund manager can take on an additional $1 billion under management without adding a huge number of additional analysts, if a doctor takes on many more patients, he or she will need to hire a proportionately larger number of doctors to treat them. Most hedge fund managers let computers do much of the work -- something doctors can't do.
But there's really more to it than that -- society perceived that the pricing mechanism for doctors' services was broken. That is, if the free market set the price, many citizens would not be able to afford to pay. And society believes implicitly that health care should be widely available to citizens. (That doesn't mean everybody. 40 million Americans are not covered by health insurance but many of them can get care at hospital emergency rooms.)
But given the perception of a broken pricing system, government and managed care organizations intervened. Thus, if a doctor takes patients who do not directly pay their own bills -- but rely on Medicare, Medicaid, or an HMO -- then the price for that service is set by someone other than the doctor.
By contrast, hedge fund managers are free to pick their customers and set their prices based on what the market will pay. (Society does not think investing in hedge funds is something all citizens should be able to do.) And while a typical hedge fund charges 2% of assets under management plus 20% of the investment profits, Simons can charge much more because he is perceived as the best. His fee is 5% of assets under management and 44% of profits. But he beats the competition regularly. In 2006, his $6 billion Medallion fund posted gross returns of 84%; 44% after fees.
Meanwhile, a doctor's best chance to make big money is to go into investment banking -- where salaries and bonuses are in the millions and rising -- or to focus only on patients who have such deep pockets that they will write checks from their own bank accounts to hire the best talent. Thus, the highest paid doctors are probably Beverly Hills plastic surgeons who treat the highest paid actors and film moguls.
Until these economic conditions change, Doctors will continue to earn the acclamation and hedge fund managers will get the money.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.
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