Can doctors really induce demand? Review the current evidence on the existence of Supplied Induced Demand

Supplier Induced Demand is a contentious issue even among health economists and runs counter to the “normative implications of conventional models of demand and supply” (McGuire, 2000). It occurs when there is asymmetry of information between supplier and consumer. In Health Economics, the supplier is typically a physician and the consumer is the patient. The patient has a principle-agent relationship with the physician. The Principle, or the patient, relies on the agent, the physician, to act in his or her best interests regarding medical care, given that they are better informed than them. This allows the agent, who is also the supplier of the medical care, much freedom over the level of healthcare that they can provide and therefore induce unnecessarily too much medical care to their own financial gain.

Milton I. Roemer put forward the first theory of supplier-induced demand in the healthcare market back in 1959 and 1961, following what he saw as a result of the Hill- Burton Act, also known as The Hospital Survey and Construction Act of 1946. This Act made it easier for Federal funding for building not-for-profit hospitals, so as to achieve a ratio of 4.5 hospital beds per 1,000 people (Brinker and Walker 1962). Roemer noticed a community in upstate New York looking for funding for a new hospital, despite having a hospital already working at 70% capacity. When the community received funding for the additional hospital, Roemer expected the second hospital to be empty but to his astonishment the second hospital, within a few months, operated at a 70% capacity also. This observation prompted Roemer to write an academic paper in which he stated “in an insured population, a bed built is a bed filled” (Roemer and Shain, 1959) or, to put it more generally, faced with shock to equilibrium (increase supply), health providers respond by ‘inducing demand’ (shifting the demand curve) for their services.

Supplier Induced Demand and Caesarean Deliveries

Roemer’s observation has spawned a great debate regarding the presence of supplier induced leading to many papers and studies by academics around the world. One leading paper on supplier induced demand is that of Gruber and Owings (1996). Gruber and Owings studied the increase in caesarean section delivery in the US between 1970 and 1982 when fertility rates fell by 13.5%. Before this fall in fertility, child births comprised approximately half of all obstetricians’ and gynaecologists’ income. This fall in fertility rates resulted in an exogenous shock to their incomes of about 6.75%, not an insignificant amount. During this time in fertility decline, the rate of c-sections rose immensely. C-section birth rates doubled between 1970 and 1975 and had doubled again by 1984. Was this exclusively down to supplier induced demand or were there other factors involved?

While it would be quite easy to blame this increase solely on supplier induced demand it is clearly not true. There are a number of factors that increased the rate of caesarean deliveries. One factor, and often the most cited reason, that may have contributed to the rise in the number of c-sections was the rise of technology in childbirth process. Increased use of technology that monitored foetal distress came into widespread use in the 1970s. 70% of deliveries in 1970 were reported without complications. This had fallen to 39% in 1984 (Shiono, McNellis, and Rhoads, 1987), no doubt due to the increased use of technology.

Another Factor, in the rising c-section rate, could have been the changing legal environment at the time. Marieskind (1959) reports the most frequent reason given by obstetrician-gynaecologists in choosing c-section delivery is the fear of a malpractice suit against them. She further cites the National Association of Insurance Commissioners report stating the obstetricians-gynaecologists, in the period 1975-1976, were ten times more likely to face a suit of malpractice than any other physicians. In another paper studying c-section rates in California, Main et al (2011) found obstetrician-gynaecologists today were among the medical specialties most likely to face a malpractice claim, and they “have a higher risk of an indemnity payment exceeding $1 million”.

In addition to these factors, Gruber and Owings (1996) state, that during the time studied (1970-1984), c-section delivery was associated with better health outcomes for both child and mother among physicians although, ever since it is generally agreed that vaginal delivery is better. Additionally, once c-section is the generally accepted way of treating certain types of births, it is very hard for obstetrician-gynaecologists to revert back to how they once did things and still convince themselves that they were providing the same level of care.

It is also important to look at supplier induced demand as a proponent of this large increase in the c-section rate. No doubt the incentives for supplier induced demand to physicians were there. Physician charges for c-section deliveries were $2,053 in 1989, compared to $1,492 for normal deliveries. No such data exists for the 1970s but Marieskind (1979) stated that the average difference between c-section delivery and vaginal delivery was 40%, similar to 1989 reimbursements. This difference in price was not justified by physician factor inputs. In fact, Keeler and Brodie (1993) found that “costs to the physician of a vaginal delivery vary widely, the reviewed evidence showed them to be similar to C-sections, on average” and that the workload for vaginal delivery is greater than a caesarean. Gruber and Owings (1996) claim they tended to be more efficient, often taking less time than normal birth and could be scheduled in advance. It is not surprising perhaps to notice. This price differential as well as time savings provide a large incentive for the physician. Main et al (2011) also came to the same conclusion and, continued on stating “a vaginal delivery after a c-section delivery typically are long and as a result have a lower economic reimbursement”.

When Grubers and Owing looked at the data for c-section delivery between 1970 and 1984 they found a strong correlation between fertility declines and increase in c-section delivery rates:  a 10% drop in fertility translated to almost a 1% in the rate of c-section delivery. Furthermore, there is  a  positive  relationship between  the  log  of  obstetrician-gynaecologists density  and  the  probability  of  c-section  delivery:  a  10% increase  in  the  obstetrician-gynaecologists density  raises  the  probability  of  a  caesarean  by  .6  percentage points. Not an insignificant relationship. They also found that the result of a 10% fall in fertility among the privately-insured population resulted in a rise in c-section deliveries of over 1.6 percentage points while a similar fall in fertility among the uninsured (and as a result those less likely to pay) only resulted in a .65 percentage point rise. Furthermore, they state that the 13.5 % fall in fertility only accounted to a 16% rise in c-sections.

In weighing up their data on the c-section delivery rise between 1970 and 1984, Gruber and Owings came to the conclusion that “physicians overused caesarean delivery relative to the level that would be chosen by a financially disinterested medical  provider” adding although inducement took place the “magnitude… was small”.

Supplier Induced Demand among General Physicians

Most of the research done into supplier induced demand has been based around the actions of physicians. Madden, Nolan and Nolan (2005) focused on the Irish physicians during a time when physician’s payment for medical card holders changed from fee-per-service to capitation. This change from fee-per-service to capitation was highly influenced by Tussing’s 1983 paper on which seemed to show favour for demand inducement by physicians. This exogenous change in physician allowed them to examine the extent to which utilization of physician services in Ireland is influenced by physician reimbursement scheme.

            Madden et al., found that the differentials between visiting rates of medical card holders and the rest of the population did not narrow when the physician reimbursement scheme was changed “as might have been anticipated if supplier induced demand played a major role”.

            Other studies into demand-inducement by physicians include Willensky and Rossiter (1983). They studied the significance of ambulatory visits in the US in 1977. They found that 39% of all ambulatory visits and, 45% of all dollars spent on ambulatory visits were initiated by the physician. If supplier induced demand were present, ambulatory visits were sure to be one area in which it could be exploited.

Willensky and Rossiter (1983) found that even in areas where inducement was exhibited it’s presence was small. This finding regarding demand-inducement was consistant with many of Wwnnburg’s findings also (Wennberg and Gittelson, 1973; Wennberg  1978; Wennberg et al. 1982).

Small Area Variations

Small area variations is often held up as evidence for induced demand among physicians. This has been quite sufficiently dealt with by a number of studies including Richardson and Peacock (2006), Wennburg (1988) and Mulley (2009). Richardson and Peacock cite a long list of factors that affect physician decision making including training, peer behaviour, conference attendance, personal temperament and experience, as well as infrastructural capacity to undertake further intensive investigation.

Wennburg (1988) cites huge professional uncertainty in the medical world fro such great variations among regions. He claims that professional uncertainty rather than consensus about the scientific basis of clinical practice is emerging as the dominating reality”. He lays the blame at the feet of expert panels who have failed to reach an agreed consensus on appropriate practice in treating patients. This failure of consensus has led to “validity of many specific theories physicians hold on appropriate practice” and no real efficiency and homogeneous procedures among physicians to common illnesses over large areas. 

Mulley (2009) cites that healthcare professionals become accustomed to standard policies that have been shaped by local capacity and are often very surprised to learn that policies are different elsewhere.

Conclusions

Despite many bold claims about supplier induced demand in the health sector, there isn’t much evidence to suggest that it is a large problem. True evidence for supplier induced demand seems to be sporadic at best. Richardson and Peacock (2006) state that most common explanations of supplier induced demand in the healthcare industry “are only partially convincing”. The general belief among health economists is one summed up by  Hurley and Labelle (1995) when they state “physicians can induce demand for their services, they sometimes do induce demand, but that such responses are neither automatic nor unconstrained.....bitches”.

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