Explain the Rationale for the Existence of Supplier Induced Demand in Health Care and Explore the Extent to Which Empirical Work Has Been Able to Establish Its Existence

EXPLAIN THE RATIONALE FOR THE EXISTENCE OF SUPPLIER INDUCED DEMAND IN HEALTH CARE AND EXPLORE THE EXTENT TO WHICH EMPIRICAL WORK HAS BEEN ABLE TO ESTABLISH ITS EXISTENCE

Introduction:

In the traditional market, consumers decide how much to consume and suppliers decide how much to supply and prices coordinate the decisions. For perfect competition it is assumed inter alia that there is: perfect information so that individuals are fully informed about prices, qualities etc; a lot of buyers and sellers; no single buyer or seller that has influence on the price.
But health care market falls short of the perfect market paradigm as it is dogged by many phenomena that cause it to fail (Arrow 1963). One such phenomenon is supplier-induced demand (SID), whereby health care providers, usually physicians, exploit their information advantage over patients in order to induce patients to utilize more healthcare services than they would if they were accurately informed. The phenomenon of SID tends to take an important place within social debates because it has an impact on health care expenditures, health status and the allocation of income between patients and physicians (Labelle et al 1994). Therefore, it has attracted considerable attention in the health economics literature since Roemer (1961), who observed a positive correlation between the number of hospital beds available and their use leading to the observation, ‘a bed built is a bed filled’, sometimes referred to as Roemer’s Law. Although a variety of empirical tests of SID have been reported in literature, researchers disagree on the definition of and tests for SID. The validity of the results from the tests is controversial. Therefore there is no consensus on the development and implementation of public policy based on these results (Labelle et al 1994, p349). Indeed, Doessel (1995, p.58) observed that this area of research can be described as a theoretical and empirical quagmire. After defining

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