In economics, supplier induced demand (SID) may occur when asymmetry of information exists between supplier and consumer. The supplier can use superior information to encourage an individual to demand a greater quantity of the good or service they supply than the Pareto efficient level, should asymmetric information not exist. The result of this is a welfare loss.
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. Research however suggest that the identification of supplier induced demand (SID) in the health sector may not always be accurate. An empirical study examining the effect of surgeon supply in certain areas on the demand for surgical operations found that surgeon supply is completely wage inelastic, concluding that the incentive to surgeons to increase consumer demand is therefore questionable. A further study examining the effectiveness of cross-sectional studies identifying supplier induced demand in the health sector raised the question that if suppliers can influence demand, there must be a limit on their ability to do so. The suggestion is then made that a formal mechanism is required to outline the reasoning and driving forces behind driving the demand curve outwards. Following this identification, it can be said that empirical tests for supplier induced demand may not be practical and accurate with cross-sectional aggregate date used in foundational research. Furthermore, a weakness in these studies can be found in their date of publication, 1978 and 1981 respectively. The development of medical treatments, drugs and therapeutics has advanced greatly in the last decades since these studies were published and consequentially will have likely shifted the nature of supplier induced demand in the health sector.
Explanatory theories
Target income hypothesis The target income hypothesis suggests that a physician is motivated to maintain a certain level of desired income (the target) and if their actual income falls below this level, they will then modify their behavior to restore their income back up to the target. Behavior modifications may include alterations in the physician's recommendations to patients as to the extent or appropriateness of diagnostic and treatment modalities in order to produce additional income to meet the target. Obstetricians who recommend C-sections as a standard of care for delivering babies may be using their power and authority over pregnant women and their partners as a revenue generator to reach or maintain their target income. Jonathan Gruber and Maria Owings looked at the relationship between physician financial incentives and cesarean section delivery by examining declining fertility rates in the United States. The fee-for-service (FFS) physician incentive structure makes it easier for SID to occur since it rewards the physician for increasing the quantity of services delivered rather than for the actual quality of the services; this could induce the physician to offer a higher number of services than would be the optimal amount for the patient in order to increase revenue. Some of the proposed healthcare models in the Patient Protection and Affordable Care Act (PPACA) could modify how a physician is reimbursed for delivering care that would reward quality over quantity thereby reducing SID. One of these models, the Accountable care organization (ACO), reimburses a physician through a gain-sharing model that encourages them to collaborate with other providers to deliver care thus removing some of the individual incentives to induce demand. Pay for performance may also provide a strategy to discourage overuse of unnecessary, low-value interventions by reimbursing for quality of care delivered.
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