Identification of Supplier Induced Demand in the Health Care Sector

This paper explores the issues and pitfalls encountered when attempting to test empirically the hypothesis that physician, hospital, or any other input supply level induces increasing demand for health services in the strict sense of demand shift and, through that, increased demand for the input in question. Evidence is presented which suggests that an empirical test of the supplier induced demand (SID) hypothesis of the type traditionally performed may not in fact be feasible with cross-sectional aggregate data such as is usually used. Since utilization rates are higher where there are more health-care resources, increases in the supply of hospital beds and number of physicians may lead to increases in the amount of health care sought. Congressional Budget Office [2, p. ii] There was once a cholera epidemic in Russia. The government, in an effort to stem the disease, sent doctors to the worst-affected areas. The peasants in the province of S_discussed the situation and observed a very high correlation between the number of doctors in a given area and the incidence of cholera in that area. Relying on this hard fact, they rose and murdered their doctors. (I am indebted to Evsey D. D_for this tale.) Franklin Fisher [5, pp. 2-3]