Competition among Physicians, Revisited

Ten years ago we developed a model of demand inducement in the physician services market and explored the properties of that model. We found that predictions concerning physicians' prices, workloads, and income were ambiguous and in many cases were consistent with those derived from a standard monopoly pricing model. Spurred in part by our work, numerous empirical studies of the demand inducement model have been conducted. These studies found little evidence of demand inducement for primary care physician services. Demand inducement may exist in the market for surgical services, but its extent is less than previously estimated. We disagree with those who say that physicians generate demand to avoid price controls and that national health care spending is proportional to the number of physicians; the evidence does not support these arguments. Substantial uncertainty may surround the physician's choice of diagnosis and treatment mode. However, this does not imply a breakdown of the agency relationship. In this paper we extend our earlier model of demand inducement to include variations in the quantity of services (which was previously assumed to be less than socially ideal). Using the model, we conclude that the major objection to government price setting is not that physicians will get around the controls by inducing demand; rather, price controls result in a quantity and quality of physicians' services that is not ideal and may be inferior to those provided in an unregulated monopoly.