Supplier induced demand - an essay thing.

I wrote the thing below for uni last year (so don't steal it, Turnitin will get you REAL QUICK) and I think it is an interesting thing to consider in the current Australian context given the possible introduction of a $7 Co-Payment for visits to a general practitioner and a range of other primary care services (blood tests, imaging etc). Namely as discussed below, that normative supplier induced demand (SID) may  arise even if doctors act in the perceived interests of their patients. For example, if a doctor inadvertently underestimates the financial burden to a patient in paying for various consults, treatments and test, the level of care recommended may exceed that which the patient would have chosen for themselves


Supplier induced demand (SID) refers to the notion that given the information asymmetry that exists between clinicians and their patients, that there is capacity for doctors and other health professionals to engage in inducement of consumption of healthcare services. In theory, this demand inducement would result in a higher amount of health care services being consumed than would normally be expected by an informed patient. (Bickerdyke et al, 2002).  This paper sets out to critically evaluate the arguments for and against the theory of supplier induced demand in health care, and examine closely some of the various (often conflicting) theoretical models and empirical tests of clinician behavior that have been put forward to support one idea or the other.Ö

The issue of SID is important to the analysis of competition in healthcare. If health professionals can generate demand for their care, they possess far more market power than could ordinarily be expected, as price-setting ability is normally constrained by a fixed demand curve. (Feldman and Sloan, 1988)

SID is commonly thought to take the form of an increase in the number of medical examinations or treatments that provided to a patient. In a 2002 paper, Bickerdyke et al suggested that SID can relate to two broad types of medical service — direct consultations and referrals for tests (for example, pathology and diagnostic imaging). Ö

How does SID arise? Medical market characteristics

Some characteristics particular to medical markets distinguish them from orthodox 'competitive’ markets and allow for the potential for SID, including;

Information asymmetry
Information asymmetry between supplier and consumer is not unique to medical or health care markets but the gap in knowledge between doctor and patient is one of the broadest (Guinness & Wiseman, 2011) Because most medical information is technically complex, ppatients are prepared to devolve significant decision making to physicians.  As such, care very vulnerable to inducements for services/procedures that they are not equipped to make informed decisions about whether they need services prescribed for them (Bickerdyke, 2002)

Agency Theory
The agency relationship is particularly important in health care. A patient, in almost all cases, empowers a health professional to act on their behalf by recommending a course of treatment that result in the best outcome for their condition. (Guinness & Wiseman, 2011) However, capacity exists for the agent (in this case a health care professional) to seek to exploit this weak {C}[DH1]{C} agency relationship - maximize their income via recommending unnecessary care or treatments, or minimize effort (for example time spent examining the patient) thereby gaining leisure time. The settings above create an environment where SID can be encountered (Labelle, 1994)Ö

Clinical uncertainty
Supplier induced demand arises not simply because of information asymmetry (on the part of the patient) but can also arise from the ‘more care is better care’ judgment on the part of clinicians (Bickerdyke, 2002).  Richardson & Peacock in their 2006 paper suggest that the rise in emphasis of evidence based medicine and the uncertainty that accompanies it has contributed to creating a SID environment, where tests are ordered ‘just to be sure’ (Richardson & Peacock, 2006)

It is important in examining these factors; information asymmetry, the doctor patient agency relationship and clinical uncertainty on the part of health professional create only the economic conditions in the market in which supplier induced demand may occur. They do not of course; guarantee the presence of SID in medical markets.

The idea that SID exists in practice is still one of the most hotly contested ideas in the health economic literature (Van Dijk et al 2013). In fact the debate has been called ‘unwieldy and unproductive’ (Labelle et al 1994) but still it continues.

Framing the debate – Different views of SID

Lack of agreement among health economists is pervasive in the discussion of SID. A commonly cited motive for SID is self-interest on the part of the treating doctor. Because consumers do not have the information to determine whether the treatment recommended by the treating clinician is optimal, this scenario could potentially be manipulated to the health professionals advantage -  suggesting that they are driven primarily by financial considerations, rather than by an impartial assessment of the medical necessity of the treatment (Bickerdyke, 2002).

The idea that doctors suggest additional treatment, driven primarily by a desire to boost their incomes is, somewhat understandably, met with fierce resistance by many practitioners who see themselves as acting solely in the best interests of their patients.

What is clear is that an orthodox demand/supply model - even if doctors act in the perceived interests of their patients - does not adequately explain the health care market. Various arguments, theoretical models and empirical data analysis have been provided by a number of researchers in an attempt to provide evidence for the SID effect. (Sorensen & Grytten, 2001)

As an example of the intractability of the debate in the literature, it has been suggested that there has been little progress towards consensus on the extent of the existence of SID in large part because it has not actually been consistently defined by researchers. (Labelle, 1994) In their 1994 article, Labelle et al attempt to separate the differences in definition of SID between normative and positive definitions. Similarly Bickerdyke et al (2002) use this approach in order to try and unpack the various SID hypotheses and compare across the literature.

 Normative definitions

Normative definitions depict SID as a deleterious phenomenon – that is, that health professionals will act to exploit the information asymmetry or weak agency relationship due to financial incentives from ‘extra’ services, treatments or consultations (Labelle, 1994). Some have argued that this in fact constitutes market failure. (Bradford & Martin 1995) Part of the hostility in the argument in the literature is that this normative model casts health professionals in a somewhat unflattering light – suggesting that they exploit the doctor/patient information asymmetry and imperfect agency relationship for their own purposes, which can be considered unethical behavior. The central theory of SID relies on the assumptions that under certain conditions health professionals will be motivated to recommend treatments whose costs outweigh their medical benefits purely for financial gain. It is for this reason that SID is equated with undesirable behavior and widely associated with unethical behavior (Richardson and Peacock 1999)

Normative SID may also arise even if doctors act in the perceived interests of their patients. For example, if a doctor inadvertently underestimates the financial burden to a patient in paying for various consults, treatments and test, the level of care recommended may exceed that which the patient would have nominated. (Bickerdyke, 2002) 

Positive definitions

Because of these negative connotations, many models of SID make an attempt to account for the complexity of the motivations of clinicians with regard to the agency relationship – the intrinsic motivation to provide the best possible level of care for patients overrides their wish for financial gain whilst still asserting that SID does (theoretically) exist (Guinness & Wiseman 2011)

While SID is usually regarded as an undesirable market phenomenon with negative impacts for the community at large, there is an argument that it can have a positive effect. Encouraging patients to participate in clinical trials of new drugs could be classified as supplier induced demand in some models, but the benefit to the patient is clear.

As previously indicated, Richardson and Peacock (2006) propose an explanation of SID that is consistent with ethical behavior, and as such a positive definition for the phenomena. Using empirical Australian evidence, they explore the idea that in fact due to the rise in emphasis on evidence based medicine  health professionals face more uncertainty in making clinical judgments, and as such act consistently with the ‘more care is better than less’ notion.

Doctors are imperfect agents, and their ability to directly induce demand for health care services directly conflicts with the orthodox model of demand and supply, regardless of the intrinsic motivations of health professionals to provide the best possible care for their patients. (Richardson and Peacock, 1999)

Richardson and Peacock (1999, 2006) make a compelling argument that the most persuasive support for the theory of SID has always been, and remains, that SID provides the most satisfactory explanation of the major facts of the medical market.Ö

Measuring SID – conflicting interpretations of data

Debate in the literature about SID is not only limited to values based discussions about whether clinicians would act to influence demand, maliciously or otherwise. A parallel debate explores the robustness of methodology for testing for SID effects – of course these are intrinsically linked, the more methodological issues identified in one or the other sides of the debate, the less likely an consensus will likely to be reached (Richardson and Peacock, 1999)

According to Labelle, et al, 1994 despite the numerous research projects investigating SID, the ‘studies often yield contradictory evidence, are not generalizable, and are subject to conflicting interpretations’. Individual analyst’s ideological predispositions, particularly the degree of commitment to neoclassical economic theory, can impact on the interpretations of results and generate controversy. (LaBelle, 1994)

In the literature, ideology around SID among health economists is split into two broad groupings, the ‘Bs’ (broad economists) and the ‘Ns’ (narrow economists). A number of studies use this classification (Labelle et al, 1994, Feldman & Sloan, 1988, Evans, 1987, Bickerdyke, 2002)

In their oft cited 1988 paper, Feldman & Sloan (1988) suggest that the key issue dividing these groups was whether the demand curve for physician services is subject to shifts induced by physicians in pursuit of their own interests: the Ns argued that it was not and the Bs argued that it was. The categorisation of researchers and their ideologies was not at issue, but their conclusions in that landmark paper were controversial and were swiftly rebutted by Rice and Labelle in their 1989 paper in response.

 Broad economists challenge the view that SID does not impact in health care markets and are critical of studies that little or no evidence of inducement. The so called ‘Narrow economists’ assert that studies that do find evidence of widespread inducement are flawed. (Rice & Labelle, 1989)

Empirical investigation and analysis of SID is a challenging and controversial are of health economic study. Complexities of the health care market combined with the range of opinions about what constitutes inducement contribute to the difficulty in reaching consensus. (Bickerdyke et al 2002)

The demand effect of the SID hypothesis is not directly measurable. Given this complexity, researcher has developed variety of theoretical models and empirical tests that display varying degrees of sophistication and support for the hypothesis. (Bickerdyke et al 2002)

 Testing for absolute SID involves the impossible task of observing a perfectly informed patient (Mooney 1994). Therefore, it has been marginal SID, i.e. inducement upon entry or upon a change in fee, which has been tested for, involving the additional assumption that physicians induce more as their income gets under pressure. (De Jaegher and Jegers 2000)

 The test used most often to explain the SID effect is the use of doctor/population ratios. It involves examining how the utilisation or price of medical services changes in response to changes the density of clinicians in an area. The hypothesis underlying the test is that, in response to an increase in the doctor/population ratio (increasing competition) exerting downward pressure on their incomes, doctors will seek to induce demand or raise their fees so as to maintain their incomes. A large number of studies using aggregate data have examined this hypothesis some have found evidence in support of inducement, while others have not. This is indicative of the B vs. N debate that means that 2 analysts can look at the same set of data and reach a different conclusion (Bickerdyke et al 2002)

Some studies have been useful in identifying and quantifying SID when a regulatory change or pricing/remuneration change has happened in a particular healthcare market. For example, changes in cost sharing arrangements in the Netherlands in 2006 led to clear financial incentives for general practitioners. Previously the country had separate remuneration for systems for ‘socially’ insured (government assisted) consumers (serviced via a capitation model) and privately insured patients (fee-for service). This was changed to a combined system of capitation and fee for service for both groups. The study concluded that, among other things that the introduction of fee-for-service billing for socially insured patients led to an increase in physician initiated utilization, pointing to an effect of supplier induced demand (Van Dijk et al 2013) Of course it could also be argued that once the capitation was removed, doctors were able to provide an optimal level of service – a level that was kept artificially low due to the effect of the capitation model.Ö


 In practice, the likelihood of SID occurring and the magnitude of its impacts will be shaped by the interaction of a range of factors that affect doctor and patient behaviour and the effect of institutional and regulatory arrangements on the market for medical services.(Bickerdyke et al 2002)

Recently, Labelle et al. (1994) have argued that more attention should be paid to the consequences of SID. If additional health services result in improved health status or better access to health care, then SID may be beneficial to society irrespective of physicians’ motives for generating more services. Similarly it can be argued that patient satisfaction may in fact be improved by additional supply of health services, even if the additional services are induced. (Carlsen & Grytten, 2000)

Richardson and Peacock (1999, 2006) make a compelling argument that the most persuasive support for the theory of SID has always been, and remains, that SID provides the most satisfactory explanation of the major facts of the medical market.

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

Bradford, WD and Martin, R (1995) Supplier Induced Demand and Quality Competition: An empirical investigation Eastern Economic Journal 21 (4) 491-503

Carlsen, F and Grytten, J. (2000), Consumer Satisfaction and Supplier Induced Demand. Journal of Health Economics 19 2000 731-751

De Jaegher, K. and Jegers, M (2000) A model of physican behaviour with demand inducement. Journal of Health Economics 19:2000 231-258

Feldman, R. and Sloan, F.  (1988) Competition among Physicians: Revisited
Journal of Health Politics, Policy and Law, Vol. 13, No. 2,

Grytten, J and Sorenson, R. (2001) Type of Contract and supplier-induced demand  for Primary Physicians in Norway Journal of Health Economics 20: 379-393

Guinness L, and Wiseman, V (2011) Introduction to Health Economics 2nd Edition London, UK. Open University Press

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

Peacock, S and Richardson, J (2007) Supplier Induced demand: re-examining identification and misspecification in cross sectional analysis European Journal of Health Economics 8: 267-277

Van Dijk, C, Van den berg, B., Verheija,R., Spreeuwenberga, P.,  Groenewegena, P., a and De Bakkera, D. (2013) Moral Hazard and Supplier Induced demand: Empirical evidence in General Practice Health Economics 22: 340-352

Richardson, J and Peacock, S (2006) Supplier induced demand: reconsidering the theories and new Australian Evidence Appl Health Econ Health Policy 5 (2) 87-98

Sorenson, R and Grytten, J (1999) Competition and Supplier-Induced Demand in a Health Care System with Fixed Fees Health Economics 8: 497-50