Supplier-Induced Demand: Some Empirical Evidence and Implications

Abstract

The professional relationship arises from the significant information differential between physician and patient, and permits the physician to exert direct, non-price influence on the demand for his own services. If the economic status of the physician affects the level and direction of such influence exerted, then models of the demand for care which do not include explicit consideration of supplier behavior are incompletely specified.

This paper outlines the effect on demand analyses of two alternative specifications of physician behavior, and notes that each can lead to ‘perverse’ response of price to increases in supply, or of quantity demanded to price. It then examines several pieces of empirical evidence from Canada and the United States which are consistent with substantial demand influence by physicians, with responses of generated output to physician stock around 80 per cent through increases in supply of physician-initiated services. The conclusion is that policy to limit price inflation, correct ‘shortages’ or restrain unnecessary utilization cannot be based on conventional supply and demand models.

This is a revision of the paper given in Tokyo. Care has been exercised to retain the trenchancy of the commentators’ observations.