Supplier Induced Demand Part 2: Letting down our regions

Lack of adequate health services in rural and regional Australia is well documented. In the second part of my series on supplier-induced demand (if you missed part 1, click here for enlightenment!) I will be considering the possibility that Australia’s health system is in fact causing this problem – through the use of fee-for-service payment mechanisms, also known as Medicare. This payment method creates strong incentives for doctors to locate their practice in high density areas.

Supplier-induced demand (SID) theory suggests that particular payment methods implemented in the healthcare sector could play a major role in influencing physician behaviour.

Globally, healthcare markets implement one of three payment systems: (Folland, 2010)

  • Fee-for-service: practitioners are paid a particular amount per service they provide (either directly by the patient or through an insurer – the Australian Medicare system);
  • Capitation: practitioners are paid certain per-capita amounts per enrolled patient, based on a particular defined area;
  • Salary: practitioners are paid a defined lump sum regardless of the number or mix of services provided.

Leading studies made into the area of SID and payment systems have focused on the role of fee-for-service (FFS) models providing physicians with an increased scope to undertake behaviour synonymous with SID (Productivity Commission, 2002).

Research undertaken by Hickson, Altemeier and Perrin (1987) worked to directly compare physicians in one facility paid either by a FFS or salary-based system, determining whether there were any significant differences in the number of services provided to patients, and how these compared to industry (paediatric) guidelines. The survey found that FFS practitioners were more likely to not only see their patients more often (3.69 visits per year vs. 2.83 visits), but also see more patients who were not unwell for preventative health purposes (1.42% of patients vs. 0.99 % of patients), and attend more visits personally, providing better continuity of care (86.6% of visits attended vs. 78.3% of visits).

This suggests that the implementation of FFS payment systems provide an incentive for medical practitioners to not only conduct more appointments, but also work in areas where there is a higher demand pool to tap into – choosing practices in large metropolitan areas, rather than relocating into regional or rural locales.

A number of researchers have however attempted to find alternative explanations for the SID correlation. These include (as mentioned in part 1 of this article) the ideas of clinical uncertainty, combined with the doctor’s belief that a treatment will actually benefit the patient. It is then up to the patient to decide whether the potential benefit outweighs the cost – a classic economic consideration!

The main issue surrounding the impact of SID and geographic location has been in providing an effective incentive for practitioners to move out into rural or remote areas, given the high-density oriented benefits surrounding the general FFS system. Some policy suggestions to tackle the issue include: (Phelps, 2003)

  • Remuneration packages – implementation of generous salary-based schemes in rural regions;
  • Premium incentives – addition of extra payments onto existing FFS models in particular areas;
  • Mandatory placements – compulsory regional hospital service stints for new medical graduates or skilled migrants.

The effectiveness of such mandatory policies has however been questioned over recent years as it becomes apparent that new doctors are unlikely to remain in regional practices once their mandatory years are up – taking their knowledge and moving back to the big smoke.

Given the critical shortages currently facing many of Australia’s more remote and rural regions, any policy made to tackle the issue should therefore be made on the basis of encouraging health practitioners to move into such areas with long-term incentives.

Necessary inclusions could be the provision of a well-rounded salary package, inclusive of housing arrangements, education for children, as well as providing a premium-type bonus in order to effectively compensate for a physician’s potential loss from avoiding FFS schemes.

As a local example, the Australian Government has attempted to recommend such salary-based incentive programs to skilled migrants through its General Practice Rural Incentives Program (GPRIP) – however these payments are made as a top-up on a physician’s existing income, in bands depending on regional and service-length considerations (Australian Government Department of Health and Ageing, n.d.; Medicare Australia, 2012).

The focus of any such scheme implemented to draw practitioners (in any field) to country areas should be built on voluntariness – greater physician power in creating a possible salary package could be introduced, in order ensure personal preferences are addressed to make such a move worthwhile.

The question remains however, what have we learned from all of this? Whilst Medicare is generally a logical system to facilitate payment of our medical professionals, perhaps it is not the best way to go about incentivising doctors to practice out in regional areas. True, formulating a more holistic salary package for these professionals may end up being more costly on an annual basis, but surely the benefit of health they provide to the patients they treat is worth more than this? I’ll leave that for you to think about!

Note: if anyone would like to see a numerical representation of this data, check out the table below – think about the massive drop in numbers across the board as we move from city to remote areas!



Australian Government Department of Health and Ageing (n. d.). General Practice Rural Incentives Program. Retrieved 6 May, 2012, from

Australian Government Department of Human Services, Medicare Australia (25 January, 2012). Practice Incentives Program. Retrieved 6 May, 2012, from

Bickerdyke, I., Dolamore, R., Monday, I. and Preston, R. (2002). Supplier-induced Demand for Medical Services. Productivity Commission Staff Working Paper, Canberra, November.

Folland, S., Goodman, A. C., & Stano, M. (2010). The Economics of Health and Health Care (6th ed.). New Jersey, United States of America: Pearson.

Hickson, G. B., Altemeier, W. A., Perrin, J. M. (1987). Physician reimbursement by salary or fee-for-service: effect on physician practice behaviour in a randomized prospective study. Pediatrics 80(3): 344-350