Supplier Induced Demand - Health Economics

Health Economics

The doctor-patient relationship is key to the practice of healthcare and is central to the delivery of high quality efficient care while maintaining costs. Controversy surrounds the extent and existence of supplier induced demand (SID). Some believe it is ideological rather than evidence based. Validity of results from different models is reported to lack consensus, making policy difficult to develop and implement. Normative definitions cast negative aspersions on physicians indicating they act as imperfect agents for their own self-interests. A positive perspective of SID focuses on a physician's ability to shift a patient's demand curve to the right. Demand inducement refers to a "physician's alleged ability to shift patients' demand for medical care at a given price, that is, to convince patients to increase their use of medical care without lowering the price charged." Economists have explored how this additional care will affect patient welfare.

In health economics, supplier induced demand (SID) can be defined as the amount of demand that exists beyond what would have occurred in a market in which patients are fully informed. In healthcare, a physician acts as an agent on behalf of the patient (the principal) guiding them to make the best possible treatment decisions. This agency relationship is influenced by information asymmetry between a physician and a patient, where it is assumed that the physician has more knowledge about diagnostic and treatment options than the patient. Asymmetry of information can also be influenced by the physician's own clinical experiences, expertise, and professional judgment as sometimes a patient will request their physician's personal opinion to aid them in making a healthcare decision. A physician who is a "perfect agent" is one who would make recommendations for a patient that the patient would make for themselves if they had the same information. SID can occur because of a breakdown in this agency relationship and happens when a physician recommends or encourages a patient to consume more care than is required for their medical problem, for example, ordering tests that the physician knows are not needed to make a diagnosis or ordering treatments that the physician knows will have minimal benefit.