Physician-Induced Demand

Physicians are often blamed for the high cost of healthcare in the US. Physicians dupe patients into consuming too much care, the story goes, driving up costs without producing commensurate gains in health. This line of reasoning derives from the physician-induced demand (PID) hypothesis, which is a long-debated topic in health economics. Under the PID hypothesis, physicians influence patient demand to suit their own interests. They are able to do this because their patients know relatively little about the type or quantity of treatment they need. Faced with payment systems that reward quantity of care on the margin, the inducing physician provides care beyond the level that objective clinical judgment and patient preferences would dictate. In short, inducing physicians create their own demand rather than reacting to market demand. The idea that doctors create their own demand is often used to make the case for healthcare reform, particularly changes to provider payment systems. Peter S. Orszag, the director of the Office of Management and Budget from 2009–10, was paraphrased by the New York Times as saying, ‘the supply of hospitals, medical specialists, and high-tech equipment appears to generate its own demand’ in June of 2009 (Pear, 2009). Induced demand is also a leading explanation for the geographic variation in utilization that has been documented across the US (Fisher et al., 2003a, b). Atul Gawande has argued in the New Yorker magazine that induced demand combined with differences in the ‘culture of money’ across areas explains regional variation in Medicare costs per capita (Gawande, 2009). Although there has been no rigorous test of this relationship (as noted in Fuchs (2004)), policymakers have latched onto the idea that altering physician incentives in high cost areas can reduce costs without sacrificing quality of care. ‘The Economic Case for Health Care Reform’ of the White House states, ‘‘large variations in spending suggest that up to 30 percent of health care costs (or about 5 percent of GDP) could be saved without compromising health outcomes’’ (http://www.whitehouse.gov/administration/ eop/cea/The Economic Case for Healthcare Reform). This article reviews the empirical evidence on PID from the health economics literature. In the next section, induced demand is defined and the evidence on the topic reviewed. The following section brings evidence to bear from related literatures. Finally, the concluding section discusses policy implications and areas for future research.