Introduction
In the health sector, the care providers receive the blame for the high cost of their services all over the world. In fact, health practitioners encourage their patients into consuming much care, a situation that drives up the costs of care without necessarily creating commensurate gains in their patients’ health. Hypothetically, the law of demand and supply stipulates that when there is an increase in supply, the equilibrium price should decrease. However, this is not the case since whenever the care providers increase the supply of their service to the patient; the equilibrium price continues to rise. The aspect does not take place in isolation, but it is created through inducing supply, which on the other hand increases the demand based on the market failure concept known as the asymmetric information. Therefore, to understand the aspect of the supplier-induced demand in the healthcare, it is imperative to understand how the concept is created by the healthcare providers as well and embraced by the patient without their knowledge.
Healthcare Sector
It is worth noting that to some extent, the scope of SID takes place in any market where the consumer has lesser information than the manufacturers or the producers, including such markets as legal services, financial advice sector, vehicle repairs among other areas. The arrangement of private or public insurance in most countries under OCED offers the patients with a slight incentive to confine their demand for the health care services, hence, creating a possible arena for SID (Bickerdyke, et al., 2002). However, despite the presence of empirical research in various parts of the world, the aspects of inducing demand have an inadequate definite measure, and it is inherently hard to access. In essence, this is based on the aspect that SID can only be indirectly estimated.
Empirical Evidence: Doctor Case
Handley, Holahan, & Scanlon (1979) gave a concise definition of supply-induced demand or the physician created demand as the alleged ability by the physician to shift the demand of the patient for the medical care at a particular price. As such, the patient is convinced to augment his/her use of medical care without correspondingly enjoying reduced prices for the services given. In fact, this argument is the basis for various other definitions that has been developed later by other scholars. However, the concept behind SID and its impact on the health care sector can be understood through a case scenario as will be discussed below. In this case, the big question will be whether the healthcare demand curves take the same shape with the normal demand curve, which slopes downwards.
Graphical representation of SID
As indicated in the graph below (fig 1), if the doctor’s supply is increased from supply1 to supply2 then the price fall from P1 to P2.
However, in the presence of supplier-induced demand, the medical practitioner raises the demand from demand 1 to demand 2 to ensure that the prices remain constant. For instance, the best care may comprise rechecking the patient three times in a single week. However, if the medical practitioner has more patients, he/she may decide to recheck the patient once a week. On the other hand, if the doctor’s supply increases, then the visit may be rescheduled to three times a week. In this case, the doctor does not consider the move as increased demand but sees the move as providing the best medical practice. In essence, the doctor has increased the demand for the services without any corresponding decrease in price. Another indication that supports the aspect of SID is the assertion that the number of surgeries taking place in a certain area are directly related to the number of surgeons who practice in the given zone.
Another scenario is indicated in the graph below (fig 2). In this case, it is evident that the concept of the SID can take place since many patients are not bothered about the prices charged by the doctors. Therefore, indicating that the price elasticity of demand is low in the medical services. In fact, customers are unmoved by the price since they have health insurance cover.
In this case, the patient is required to pay some amount while the insurance pays the remaining amount, which is usually more. For instance, if the doctor charges $50 for every visit and the patient is required to pay $10, while the insurance clears the rest. Therefore, the aspect of market failure exhibited in this case is that the low amount paid by the client will increase the demand for the health services required by the patient. In essence, the doctor’s price is at $50, which is the equilibrium price, while $10 is the only price paid by the patient. On the other hand, the increase in price may not accomplish much since the insurance will pay more amounts; therefore, this shortage created makes the doctor to increase the demand whenever the number of the doctors increases.
Canadian Health Care
Indeed, the supplier-induced demand in health care is a concern for Canadian healthcare. Traditionally, the physicians have been paid by the FFS system, which is a payment method that covers all the costs charged by the physician to the patient plus a certain margin for other services that they provide (Health Services Research Foundation, 2011). Hence, by rewarding the physicians on the volume and covering all the charges associated with the treatment, the FFS does not offer an incentive for the healthcare providers to consider the costs when handling their patients. Therefore, the physicians focus their efforts towards providing more diagnostic testing and consultations than their counterparts who are not under the FFS system. In essence, the aspect of supplier-induced demand is persisted in healthcare since the FFS system rewards the volume rather than the desired outcome as well as the appropriate treatment (Health Services Research Foundation, 2011). On the other hand, the FFS system jeopardizes the efficiency in the specialty and preventive care as well as the management of the chronic diseases.
References
Dijk, C. E., Berg, B., Verheij, R. A., Spreeuwenberg, P., Groenewegen, P. P., & Bakker, D. H. (2013). Moral hazard and supplier-induced demand: empirical evidence in general practice. Health Economics, (3), 340.
Bickerdyke, I., Dolamore, R., Monday, I. and Preston, R. (2002). Supplier-induced demand for medical services, Productivity Commission Staff Working Paper, Canberra, November.
Hadley, J., Holahan, J., and Scanlon, W. (1979). ‘Can fee-for-service reimbursement coexist with demand creation,” Inquiry, 16 (3): 247–258.
Canadian Health Services Research Foundation (2011). Physician payment mechanisms: An overview of policy options for Canada. CHSRF SERIES ON COST DRIVERS AND HEALTH SYSTEM EFFICIENCY: PAPER 3. Ottawa, Canada
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