Supplier-Induced demand : part 1

Health Economics is a fascinating topic, but I just can’t understand the concepts and models from a clinical perspective. A good example of this difficulty is the theory of supplier-induced demand, and here I explore this hypothesis from a clinical perspective and in view of recent data not supporting this controversial concept. This is the first part of an essay I submitted for the applied microeconomics course, and I’ll publish the second part next week.

Drawing on evidence, discuss the proposition that doctors induce demand for health care

Supplier-induced demand (SID) as a theory of physician behaviour has been the source of abundant controversies in the field of health economics (Labelle, Stoddart et al. 1994). The main issue underlying SID is the dual role of the doctor as both agent to the patient and supplier of health services, in view of an asymmetry of information in the doctor-patient relationship (Folland, Goodman et al. 2007). This has led economists to ask if doctors use this agency relationship to their own financial advantage by recommending and providing health services that the patient would have refused if well informed (Dolan and Olsen 2002; Folland, Goodman et al. 2007). I will use this definition to analyze the literature relating to SID, using clinical insight and other relevant aspects not taken into account by most models, in order to broaden the perspective and nuance the proposition.

Roles of the doctor

"The aim of medicine is to assist in the process of healing. [...] Doctors do this by providing care, relieving suffering, promoting health, preventing illness and disease."
(Calman 2005). From this conception of the role of doctors, which incorporates crucial aspects of medical care and doctor's utility not assumed in most models, it seems less appealing to support SID.

I also wish to characterize the clinical decision making process as another nuance to SID. Clinicians rely on their clinical judgment, based on experience and knowledge, to derive a probable diagnosis. This process is bound by uncertainty, which is balanced by a proportionate amount of testing to reduce this uncertainty in order to make sound therapeutic suggestions. The quantity of services required will vary between clinicians and will very often depend on the patient's ability to communicate information about his condition. This might be a substrate for increasing the utilisation of health services, but it is then the essence of the doctor's roles and shouldn't be called inducement as such in view of the actual definition used.

Empirical evidence against SID

Many studies from Norway [(Grytten and Sorensen 1995) (Sorensen and Grytten 1999)
(Grytten and Sorensen 2001)] and elsewhere have contributed to the literature on the non-existence of SID. Most of these more recent studies use non-aggregated data as opposed to previous studies, and this is more relevant to the study of physician behaviour considering the specifications of the SID model.

Studies on the effect of physician supply

Labelle (Labelle, Stoddart et al. 1994) has reviewed the literature on SID extensively, and one method to study SID is to analyse the effect of physician supply.

First, supply can be correlated to use of health services, but a major problem is the assumption that demand will necessarily shift down after an increase in supply, resulting in lower price. This situation does not hold in the context of excess demand. Obviously, in such a context, supply will be limited, and the optimal utilisation of services to fulfil inelastic needs unavailable. When supply of doctor increases in this context, the observed increase in utilisation is by no mean induced, but is in fact a response to prior unmet excess demand. Observations in Québec's public health care system support this explanation: a third of patients don't have a GP, waiting times are long for any specialist care, and health care professionals feel the pressure from unmet demand. It is predicted that the announced increase in medical school admissions in response to excess demand will lead to an increase in demand, but not because of inducement. As an assumption, many SID models do not recognize excess demand, and a more cautious approach seems warranted. Also of interest from this perspective is the positive impact of improved physician supply on customer satisfaction as a proxy for patient utility (Carlsen and Grytten 2000). The detection of any sign of inducement would condemn such desirable increases under conditions of excess demand, and SID is thus unsatisfactory as an acceptable model.

Second, studies on the impact of supply on physician utility assume that income is the only source of utility, but there are many powerful utility determinants for the average physician : patient satisfaction, the sense of duty towards patients and society, relieving suffering, professional achievement. They all have a profound impact on the quantity of health care delivery and take part in the trade-offs of daily practice, and not taking them into account alters the relevance of SID models. Another source of (dis-)utility in this regard is the litigation risks associated with medicine. If detrimental outcomes is important in refining the concept of SID (Labelle, Stoddart et al. 1994), and considering that most people and doctors are risk averse, doctors wouldn't risk detrimental outcomes in patients under their care for the sake of increasing demand. Interestingly, they would be more risk averse the more greedy and self-interested they are, because of the higher probability of an unfavourable judgment if they were to appear in court for unjustified interventions gone bad. Again, basic assumptions of the inducement models are inaccurate, and invalidate any conclusions they draw.

Third, as an alternative to SID in explaining any increase in fees following increased supply, a model taking into account the capacity to increase the quality of health services in the context of increased competition can justify higher price [(Feldman and Sloan 1988) as reported in (Folland, Goodman et al. 2007)]. Consequently, inducement is not a necessary explanation for the response to increases in supply.

References

(2007). "Oxford Advanced Learner's Dictionary." Retrieved 7th November 2007, 2007, from http://www.oup.com/oald-bin/web_getald7index1a.pl.

Calman, S. K. (2005). "Medical Professionalism." Retrieved 7th November 2007, from http://www.rcplondon.ac.uk/wp/medprof/medprof_prog_050506.asp#calman.

Carlsen, F. and J. Grytten (2000). "Consumer satisfaction and supplier induced demand." Journal of Health Economics
19(5): 731-753.

Dolan, P. and J. Olsen (2002). Distributing health care : economic and ethical issues, Oxford University Press.

Dranove, D. and P. Wehner (1994). "Physician induced demand for childbirth." Journal of Health Economics
13: 61-73.

Feldman, R. and F. Sloan (1988). Competition among physicians revisited. Competition in the health care sector : ten years later. W. Greenberg. Curham, Duke University Press.

Folland, S., A. Goodman, et al. (2007). The physician's practice. The economics of health and healthcare, Pearson Prentice Hall

313-330.

Gerdtham, U. and B. Jönsson (2000). International comparisons of health expenditure : theory, data and econometric analysis. Handbook of health economics, Elsevier science. 1: 12-53.

Grytten, J. and R. Sorensen (1995). "Supplier Inducement in a public health care system." Journal of Health Economics
14: 207-229.

Grytten, J. and R. Sorensen (2001). "Type of contract and supplier-induced demand for primary physicians in Norway." Journal of Health Economics
20(3): 379-393.

Hadley, J., J. Holahan, et al. (1979). "Can fee-for-service reimbursement coexist with demand creation?" Inquiry
16: 247-58.

Kenkel, D. (1990). "Consumer health information and the demand for medical care." The Review of Economics and Statistics
72(4): 587-595.

Labelle, R., G. Stoddart, et al. (1994). "A re-examination of the meaning and importance of supplier-induced demand." Journal of Health Economics
13: 347-368.

Richardson, J. and S. Peacock (2006). "Supplier-Induced demand : reconsidering the theories and new australian evidence." Applied Health Economics and Health Policy
5(2): 87-98.

Sorensen, R. and J. Grytten (1999). "Competition and supplier induced demand in a health care system with fixed fees." Health Economics
8: 497-508.

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For those who would like to see my notes, from now on, I'll post them on webCT in the IHM exchange section we created. Sorry if you are from outside imperial!

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Stéphane Lemire is licensed under a
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