Association for Public Policy Analysis & Management

The Veterans Administration (VA) is a large integrated healthcare system that provides health services to a population of more than 8 million military veterans. It owns and operates more than 150 medical centers and 800 community health clinics that are staffed by physicians and nurses who are salaried public employees. In recent years, the VA has struggled to meet the health service needs of its patient population in part because of difficulties recruiting and retaining physicians. These apparent labor shortages at the VA have attracted the attention of the popular media and policymaker. We use a difference-in-differences research design to study a policy intervention aimed at bolstering the supply of physicians to the VA by altering the level and heterogeneity of VA physician salaries. We show that the compensation reforms improve retention among highly specialized employees but are largely ineffectual for increasing the rates of new hires. However, the reform also changed the composition of newly hired physicians. Results further indicate that VA facilities possess considerable market power over those selecting into government work. More flexible pay schedules also allow the VA to attract new physicians to less desirable locations via compensating wage differentials.