I don’t know about you, but I often feel like I’m being called back to the doctor for no reason – to take another ‘all-clear’ blood test, have a six-monthly examination I didn’t know I needed, or simply undertake a fitness check － all to be told that, at the end of being poked and prodded I am just as healthy as I was beforehand. Go figure.
While being able to access healthcare so readily is no doubt a good thing (and puts Australia above most of the rest of the world in terms of living standards), over recent years researchers have identified a curious phenomenon unique to the health market – the idea of ‘supplier-induced demand’.
Over this and my next article I hope not only to educate you about this weird market occurrence, but also provide some examples of how it shifts the incentives facing many medical professionals out in the workplace. A healthcare version of ‘greed is good’, if you will, encouraging healthcare users to demand every kind of treatment under the sun, regardless of necessity: all because we’re told to.
Supplier-induced demand (SID) is exactly what it sounds like – demand for a product or service not generated from the consumer and their own needs or preferences, but by the very provider themselves. I can hear all of you free market economists out there (myself included) screaming “but how?!” – trust me, I was just as surprised.
Consider it this way – this is a phenomenon unique to the healthcare market, where we as the uneducated patient rely on our doctors to both diagnose and treat us accordingly. This is exactly where the problem lies; a Productivity Commission study (2002) found a ‘commonly cited motive of self-interest’ amongst the physician community is leading to ‘an increase in the number of services performed or a change in the service mix’, even where demand remains unchanged, or there is an increase in the number of doctors supplied.
SID theory was established following observance of a trend seen across economies where an increase in the number of physicians, causing a rightward shift in the supply curve for healthcare, is matched by an equal or slightly lesser increase in the total demand for healthcare – an effective shift of the demand curve (Feldman & Sloan, 1988).
This is demonstrated (as usual, best shown by a graph below) as limiting or preventing any price declines that would have been seen in the healthcare market, had the increase in quantity operated efficiently (Q1 à Q2, P1 à P2). Therefore, all we end up seeing as a consumer is an increase in supply, matched almost perfectly by an increase in demand – even without any form of population growth!
Market forces surrounding SID – Productivity Commission, 2002
Explanations for these movements include attempts by physicians to mitigate their loss in revenue and return to their ‘target income’ (Evans, 1974) – namely through effectively over-servicing their patients and increasing appointment volumes (Evans, 1974). Thus, this shows the ability of doctors to effectively ‘tailor’ the demand for their services and overall income to where they want it to be. As they have such control over their demand base, medical professionals have not only the power over our health but over their incomes too – pretty cool, really.
However, the story doesn’t end there. The ability for doctors to create SID in a healthcare market also depends on the ‘scope’ of conditions in the healthcare market allowing physician ‘self-interest’ to have an impact (Productivity Commission, 2002). The Productivity Commission noted that some factors ‘conducive’ to SID’s occurrence include:
- The impact of information gaps and imperfect agency – both information asymmetry and uncertainty about the effectiveness of treatment, encouraging excess usage;
- Doctor objectives – the presence of ownership and payment structures encouraging the maximisation of incentives;
- Impact of defensive medicine – increasing threats of medico-legal litigation working to force doctors into giving the most treatment possible, to avoid negligence claims; and
- Institutional environments – allowing consumers free choice of practitioners, providing doctors with a ‘strong incentive…to attract and retain patients’.
This shows that at the end of the day, doctors are just like providers in any other market – they are aware of the advantages they possess over the patients they treat, and whilst not necessarily seeking to exploit them, will provide whatever service they feel could be helpful, even where it may have a low marginal benefit. Something to think about next time a doctor asks you to take a test!
Postscript: Though seriously, I hold no liability for what happens if you refuse. The doctor knows more about you than you do. Take the test.
My next article will hone in on the ‘scope’ factor of health sector payment systems – in particular Australia with our fee-for-service Medicare system, and how that contributes to SID as a continued phenomenon across the industry.
Bickerdyke, I., Dolamore, R., Monday, I. and Preston, R. (2002). Supplier-induced Demand for Medical Services. Productivity Commission Staff Working Paper, Canberra, November.
Evans, R. G. (1974). Supplier-induced demand: some empirical evidence and implications. In Perlman, M. (Ed.), The Economics of Health and Medical Care. New York: John Wiley and Sons.
Folland, S., Goodman, A. C., & Stano, M. (2010). The Economics of Health and Health Care (6th ed.). New Jersey, United States of America: Pearson.
Richardson, J. R. J., Peacock, S. J. (2006). Reconsidering theories and evidence of supplier induced demand. Research Paper No. 13, Centre for Health Economics, Monash University, Melbourne.