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Supplier-Induced Demand

Reconsidering the Theories and New Australian Evidence

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Abstract

This paper reconsiders the evidence and several of the key arguments associated with the theory of supplier-induced demand (SID). It proposes a new theory to explain how ethical behaviour is consistent with SID.

The purpose of a theory of demand and one criterion for the evaluation of a theory is the provision of a plausible explanation for the observed variability in service use. We argue that Australian data are not easily explained by orthodox possible explanation. We also argue that, having revisited the theory of SID, the agency relationship between doctors and patients arises not simply because of asymmetrical information but from an asymmetrical ability and willingness to exercise judgement in the face of uncertainty. It is also argued that the incomplete demand shift that must occur following an increase in the doctor supply is readily explained by the dynamics of market adjustment when market information is incomplete and there is non-collusive professional (and ethical) behaviour by doctors. Empirical evidence of SID from six Australian data sets is presented and discussed. It is argued that these are more easily explained by SID than by conventional demand side variables. We conclude that once the uncertainty of medical decision making and the complexity of medical judgements are taken into account, SID is a more plausible theory of patient and doctor behaviour than the orthodox model of demand and supply. More importantly, SID provides a satisfactory explanation of the observed pattern and change in the demand for Australian medical services, which are not easily explained in the absence of SID.

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Acknowledgements

The authors would like to thank the Commonwealth Department of Health and Ageing and the Victorian Department of Human Services for the data used in the empirical studies, and two anonymous referees for their comments on an earlier draft of the paper. The research was supported by a National Health and Medical Research Council (NHMRC) Project Grant. The views expressed in this paper are those of the authors, and not the funding agency.

This paper is a revised version of a working paper (Richardson J, Peacock S. Supplier induced demand reconsidered. Working paper no. 81. Melbourne (VIC): Centre for Health Program Evaluation, Monash University, 1999).

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Authors and Affiliations

  1. Centre for Health Economics, Monash University, Clayton, Building 75, VIC, 3800, Australia

    Jeffrey R. J. Richardson

  2. British Columbia Cancer Agency, Vancouver, British Columbia, Canada

    Stuart J. Peacock

  3. Department of Health Care and Epidemiology, University of British Columbia, Vancouver, British Columbia, Canada

    Stuart J. Peacock

Authors
  1. Jeffrey R. J. Richardson
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  2. Stuart J. Peacock
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Corresponding author

Correspondence to Jeffrey R. J. Richardson.

Appendix

Appendix

1. Small Area Definitions

Small area data used in empirical analysis are based on the hierarchical structure of the Australian Standard Geographical Classification.[33] In noncensus years the classification consists of statistical local areas (SLAs), statistical subdivisions (SSDs), statistical divisions (SDs) and states/territories. Under the hierarchical structure, SLAs are aggregated to form SSDs, SSDs are aggregated to form SDs, and SDs aggregate into states and territories. These spatial units cover all of Australia without gaps or overlaps. As at 1999, there were 1331 SLAs, 194 SSDs and 66 SDs covering mainland and offshore Australian states and territories. SLAs and SSDs are based on defining regions that show social and economic homogeneity through identifiable links between inhabitants, and on local government boundaries. SDs also maintain this basis but, in addition, the capital city of each state/territory is defined as a single SD.

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Richardson, J.R.J., Peacock, S.J. Supplier-Induced Demand. Appl Health Econ Health Policy 5, 87–98 (2006). https://doi.org/10.2165/00148365-200605020-00003

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