Explain the Rationale for the Existence of Supplier Induced Demand in Health Care and Explore the Extent to Which Empirical Work Has Been Able to Establish Its Existence

4389 WordsApr 15, 201018 Pages
EXPLAIN THE RATIONALE FOR THE EXISTENCE OF SUPPLIER INDUCED DEMAND IN HEALTH CARE AND EXPLORE THE EXTENT TO WHICH EMPIRICAL WORK HAS BEEN ABLE TO ESTABLISH ITS EXISTENCE Introduction: In the traditional market, consumers decide how much to consume and suppliers decide how much to supply and prices coordinate the decisions. For perfect competition it is assumed inter alia that there is: perfect information so that individuals are fully informed about prices, qualities etc; a lot of buyers and sellers; no single buyer or seller that has influence on the price. But health care market falls short of the perfect market paradigm as it is dogged by many phenomena that cause it to fail (Arrow 1963). One such phenomenon is supplier-induced…show more content…
Rationale for the existence of SID: The theoretical analysis of SID is based upon the assumption that doctors maximise their utility subject to income and inducement. Dranove (1988, p 281) argues that under certain conditions the physician will have an incentive to recommend treatments whose costs outweigh their medical benefits. SID involves a shift of the demand curve, such that as supply increases, demand also increases (Fig. 1). In practice the exact demand curves themselves cannot be measured. Only the equilibrium points (A, B, C and D) of the overall market can be observed. If the supply of doctors increases from Q1 to Q2 (Fig. 1a), then the fee payable decreases from P1 to P2. But if SID exists (Fig. 1b), as the number of doctors increases from Q1 to Q2 the doctor would keep shifting the demand curve from D through to D3 in order to maintain or increase income. Fig. 1: Graphical representation of competing hypotheses The potential for SID to arise is shaped but not guaranteed by a number of characteristics of the health care market including: information gaps and asymmetries which encourage patients to seek medical advice and delegate decision-making to doctors; potential weaknesses in the agency relationship and the impact of clinical uncertainty on the decision making processes of doctors. Systems for financing, organising and paying for medical services also influence doctor and patient behaviour. The asymmetry of information between

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