3 Supplier Induced Demand: Evidence
3.1 Overseas Evidence
Like many theories in the physical sciences Supplier Induced Demand was first suggested to explain observations which were not convincingly explained within the orthodox framework. The theory is commonly attributed to Evans (1974) who observed that across the province of British Columbia there was little variation in doctor incomes despite very significant variation in their supply. As doctors could not charge fees above the benefit (rebate) this implied service use in proportion to the doctor supply. This is, of course, consistent with orthodox economics if supply had adjusted to demand or if there had been a permanent excess demand. It is at this point of the argument—both with respect to Evans’ data and the observations in many subsequent studies—that a difference of interpretation arises. Critics of SID have generally argued that as the observations are consistent with theory, then SID is ‘unproven’. Evans and others appeal to judgement. Is it likely that variation in service use of 200 - 400 percent could be attributed to other causal factors? The effects of age, sex, income and medical status are independently known and cannot explain the discrepancy. Anecdotal evidence did not indicate significant queuing. SID was therefore proposed as an alternative explanation.
A more rigorous statistical analysis had, in fact, been published in 1972 by Fuchs and Kramer. In this, and in subsequent, similar, studies doctor supply is endogenised and explained, in large part, by doctors’ propensity to work in congenial residential areas. Inserted in the demand equation the endogenised doctor supply has had significant explanatory power.
This latter approach has been criticised statistically as discussed briefly below and various other sources of evidence have been used to support SID. For example a number of studies report an otherwise inexplicable increase in services per person following the freezing of the fee schedule. Perhaps the most notable evidence is the result of a random control trial which ‘converted’ Charles Phelps, one of the most trenchant critics of SID (see Phelps 1997 p254). In this, doctors at a university hospital clinic were randomised to receive income by salary or a fee for service. Patients attending the clinic were randomly assigned to doctors. The result was that fee-forservice doctors scheduled almost 30 percent more return visits than those on salary. Most of the discrepancy was attributable to a 50 percent greater scheduling of (medically doubtful) well care visits (Phelps 1997).
). This would be SID to avoid a possible loss of money and public image. SID may also occur for internal rather than external payoffs. E.g., associating more care with better care.
