Board of Regents of the University of Wisconsin System

Health Economist-Induced Demand for Theories of Physician-Induced Demand

Author(s): Louis F. Rossiter and Gail R. Wilensky
Source: The Journal of Human Resources, Vol. 22, No. 4 (Autumn, 1987), pp. 624-627
Published by: University of Wisconsin Press
Stable URL: http://www.jstor.org/stable/145708
Accessed: 22-08-2016 14:05 UTC
REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.org/stable/145708?seq=1&cid=pdf-reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact support@jstor.org.

University of Wisconsin Press, Board of Regents of the University of Wisconsin

System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human
Resources

This content downloaded from 196.45.48.130 on Mon, 22 Aug 2016 14:05:31 UTC
All use subject to http://about.jstor.org/terms

Health Economist-Induced Demand for

Theories of Physician-Induced Demand
In the face of unprecedented growth in the supply of physicians, the U.S. has seen price discounts for physician services, a reduction in

the growth of physician incomes, and a decline in service use per person
particularly for hospital services. Do physicians create their own demand for

services? The answer seems to be yes, to a limited extent, but not nearly as
much as has sometimes been suggested.
Elsewhere in this issue, Stano does a good job of extending our theoretical
development (Rossiter and Wilensky 1983) of the physician-induced demand theory in health economics. Our contribution made the theory internally consistent, where inconsistencies existed before in terms of limits for
induced demand; and provided more directly identifiable estimates of the
magnitude of the problem than had been available previously from only
aggregate cross-section data (Rossiter and Wilensky 1983, Wilensky and
Rossiter 1981, 1983). The important contribution of the Stano article is that
an analysis of firms is not an analysis of individuals, something we recognized (Rossiter and Wilensky 1983, 234) but did not develop in detail in our
earlier work. But where we may have used our results to jump from a
theoretical model of a physician firm to an empirical investigation of the
representative consumer in that firm, Stano has used our results for even
greater leaps of logic.
Stano is correct when he states that we linked theoretical-physician firms
with representative empirical patients. Nevertheless, our interpretations
are correct, while Stano does greater damage by confusing theoretical-per
capita averages with our representative empirical individuals. Stano would
be exactly right in his assertions if we had used geographic areas as the unit
of analysis and found elasticities less than one for per capita service or
expenditures with respect to R, the physician-to-population ratio. Unlike
many other investigators, including Stano (1985), we argued that per capita
analysis obscures too much (Wilensky and Rossiter 1983) and micro-data on
individuals is the best approach to the problem. Thus, our elasticities were
based on data for individuals and reflect the proportionate increase in
service or expenditures for a representative individual in a representative
physician firm. They are not per capita elasticities. Our results say little
about the aggregate proportionate increase in induced demand from an
[Submitted November 1986; accepted December 1986]
THE JOURNAL OF HUMAN RESOURCES * XXII * 4

This content downloaded from 196.45.48.130 on Mon, 22 Aug 2016 14:05:31 UTC
All use subject to http://about.jstor.org/terms

Comments 625

increase in R, but rather indicate that in areas where R is higher t

representative patient in the representative physician firm (whether th

physician firm is new to the area or not) has higher levels of physici
initiated service use and expenditures. To say something about per capit
service use we would need to know the characteristics of the populati

described by the variables we held constant in our regressions. The theoretical fact that per capita induced service use can increase in proportion to the
increase in R, even with unchanged quantities of inducement, is not relevant

to our findings of positive physician initiated service use and expenditur

with respect to R at the individual (not the aggregate) per capita level.
Beyond the debate over units of analysis Stano seems to suggest that t
only way physician induced demand can work is through quantities, n
prices. One important contribution of our formulation is that physici
induced demand can arise through quantity adjustments, price adjustmen
or both. Consequently, we submit that our approach does not make th
Evans formulation more restrictive but actually generalizes that formu
tion. Except for that one complaint, Stano seems to like our model ve

much. Thus if our model is not flawed, we suggest that we are not the ones

who have misinterpreted results.

What should now be clear, after all this controversy, is that physicia

certainly initiate demand for services, because after all that is why patients

pay physicians. Whether a portion of the service demand they initiate

induced demand, that is, above and beyond the level demanded by a ful
informed consumer; the answer is also affirmative. The sources of indu
demand are not one dimensional, however. Demand may be induced by
physicians because insurance encourages it. Particular physician charact
istics may be associated with physician-induced demand, and patient charac-

teristics, particularly health status, may determine the level of physic

influence on demand. The supply of physicians could influence physicia

induced demand and would be considered self-interested, physicia

induced demand, but estimates from our studies, and others, suggest t

type of supply-induced demand is rather limited. Practice style variation an

the tendency for patients in physician-rich areas to have multiple physician

is also a newly recognized and important factor (Wennberg 1985, Stan

1986), adding to the catalogue of complex reasons for expecting the phe
nomena.

One of the major policy questions surrounding the whole debate

search for the answer to the question of whether enrollment in U.S. med
schools was too high, too low, or just about right. Under present conditi

the answer would not seem to depend upon whether health economis
identify (with econometrics, logic, or rhetoric) the existence of the
cian-induced demand phenomenon. With the largest supply of phys
ever in existence in the U.S., fee discounts are commonplace, utiliz

This content downloaded from 196.45.48.130 on Mon, 22 Aug 2016 14:05:31 UTC
All use subject to http://about.jstor.org/terms

626 The Journal of Human Resources

review has flowered as a newly discovered form of business managem

and the medical profession is visibly shaken. This hardly describes a
which, when faced with more numbers of its own kind, simply gen
demand sufficient to meet income or utility objectives.
The current phenomena of corporate consolidation, price competi

moderating incomes, and empty office schedules will only be more intere

ing to observe as the health economists who created all the physici

induced demand controversy age along with the rest of the population. It
well known that the population is aging, with the percent of the populat

65 years or older rising from 11 percent in 1987 to 14 percent in 2

Demand for physician services should increase at least modestly wi
aging population because the aged demand somewhat higher quantitie
physician services. It is less well known that the secular trend upward in

percentage of the population aged levels off beginning in 1994, and o

rises gradually until 2010 whereupon it moves up again sharply. As a resu

the competitive market forces now at work can be only more pronounced

their effect on physician prices and incomes beginning about eight y

from now, as the largest supply of physicians ever seen is reached in
mid-1990s and meets a flattening demand for services.
What should be clear for even the most casual observer is that the idea is

now dead that a large component of physician self-interested, self-created

demand exists in response to changes in the supply of physicians. It can
happen and does happen; but its policy relevance is small. There are few
who would argue that the large supply of physicians now in place has not
been an enabling factor in the increasing price (and quantity) competitiveness of the market for physician services currently enjoyed by the payers of

health care. Whether high levels of physician supply should be paid for at
public expense is a separate question, however, and better answered by
knowing the social rate of return, than by creating dubious arguments about
market failures with less than obvious manifestations.
Louis F. Rossiter

Medical College of Virginia

Gail R. Wilensky

Project HOPE

References
Rossiter, Louis F., and Gail R. Wilensky. 1983. "A Reexamination of the Use
of Physician Services: The Role of Physician-Initiated Demand." Inquiry 20
(Summer): 162-72.

. 1984. "Identification of Physician-Induced Demand." Journal of Human

Resources 19(2):231-44.

This content downloaded from 196.45.48.130 on Mon, 22 Aug 2016 14:05:31 UTC
All use subject to http://about.jstor.org/terms

Comments 627

Stano, Miron. 1985. "An Analysis of the Evidence on Competition in the

Physician Services Markets." Journal of Health Economics 4 (September):
197-212.

Wenberg, J. 1984. "Dealing with Medical Practice Variations: A Proposal for

Action." Health Affairs 3, 6-32.
Wilensky, Gail R., and Louis F. Rossiter. 1981. "The Magnitude and
Determinants of Physician-Initiated Visits in the United States." In J. van der
Gaag and M. Perlman (eds.), Health, Economics, and Health Economics
(North Holland Publishing Co.: Amsterdam), pp. 215-43.
---- . 1983. "The Relative Importance of Physician-induced Demand in the
Demand for Medical Care." Milbank Memorial Fund QuarterlylHealth and
Society 61 (Summer): 252-77.
Wilensky, Gail R., and Louis F. Rossiter. 1981. "The Magnitude and
Determinants of Physician-Initiated Visits in the United States." In Health,
Economics and Health Economics, ed. J. Van der Gaag and M. Perlman,
215-43. Amsterdam: North-Holland Publishing Co.

This content downloaded from 196.45.48.130 on Mon, 22 Aug 2016 14:05:31 UTC
All use subject to http://about.jstor.org/terms