Supply and Demand for Medical Care: Or, Is the Health Care Market Perverse?

This paper examines the structure of the health sector and summarises the reasons for believing that market behaviour is idiosyncratic. The pivotal relationship which largely permits this perversity is the influence of doctors over patients or, the so called theory of `Supplier Induced Demand' (SID). Empirical evidence and theoretical arguments relating to the theory are summarised. Three analyses of Australian data are reported. These are (i) the correlational evidence from time series and cross sectional data; (ii) econometric analyses of cross sectional data; and (iii) evidence from the `natural experiment' of public and private service use following hospital admission with a heart attack. It is concluded that, while the theory of SID is well supported and helps to explain the failure of simple competitive markets, it is not of decisive importance for the determination of future health sector reform which might, potentially, adopt either a competitive or cooperative model of health service delivery