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There exists a large variation in the provision of medical care across the U.S. In addition, the supply of medical care is positively correlated with the demand. According to a widely held view, physicians induce the demand by leveraging their superior medical knowledge. This paper examines supply induced demand in medicine using an exogenous negative income shock to obstetrics/gynecologists that was caused by a declining number of births in their practice location. The number of births in the U.S. had declined by more than 8% from 1990 to 1999; as such, the physicians might have been motivated to suggest a cesarean section procedure instead of a vaginal delivery because cesarean section represents a higher reimbursement rate. The physicians might also have provided more prenatal care than was medically necessary under the fee-for-service reimbursement mechanism to compensate for their decreasing income. The results of this study indicate some evidence of induced demand in the practice pattern of the OB/GYN group. The results also suggest an increase in cesarean section procedures by 4.1 percentage points for one unit decline in the birth rate per 100 population. The results indicate no change in excessive prenatal care visits.
Source: “Do Doctors Induce Demand?” from Korea University, Discussion Paper Series, No. 0901, March 2009
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