Duke 2008 | ASHE | Equity and Efficiency in Health and Healthcare

There are many markets in which an expert simultaneously diagnoses a customer's needs and recommends a product or service to meet them. Customers have limited information on which to judge the merits of the recommendation and may, as a result, consent to excessively costly or unnecessary services. This problem, termed "supplier-induced demand" in health economics, has received considerable attention in medicine, where physicians stand to prosper by recommending and performing costlier treatments than are indicated by an objective diagnosis. This paper is motivated by the following question: what prevents physicians from always recommending more costly treatments? We posit that patients may avoid physicians who have a reputation for doing too many high cost procedures. In other words, simple market forces may limit the ability of physicians to exploit their informational advantage. We focus on the market for deliveries. We measure the practice styles of obstetricians in several counties in Florida and use this measure as a proxy for a physician's predilection to perform a high cost procedure (a cesarean section). Focusing on Orange County (home to Orlando), we then estimate a model of consumer choice, where one of the factors weighing on patient's choice of provider is that provider's practice style. We find that maternity patients prefer not to visit physicians with aggressive styles (i.e. those who may overprescribe cesarean sections), ceteris paribus. The effect is most pronounced for high income patients and HMO patients, two segments of the market that might be very attractive to some obstetricians. These estimates hold up when we use information on each physician's training to instrument for the physician's practice style. We obtain largely similar results in several other smaller counties. We conclude that demand inducement is limited by the market.