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a blog from young economists at Nova SBE

How the Imperfect Information Increases the Supplier Induced Demand?

An imperfect information situation is something that often happens in health care, since in most of the cases the physician has more knowledge about the procedures than the patient.   Information about price and the quality of a health care provider are important criteria to select a physician, however are not easy to collect. The word-of-mouth in these cases is an essential tool since we are more willing to choose and trust in a doctor after we heard from family and friends their previous experiences.

The lack of information is also an incentive to increase the number of physicians in the health market, which leads us to the concept of “increasing monopoly”. This model tells us that with a higher number of health providers in the same geographic area, the information that a patient has about each doctor decreases.  Contrary to what the economic theory says, a higher number of physicians will raise the medical services price. This happens because the process of select a doctor is more complex and costly, making the health consumers less price sensitive.

This situation increases the doctors’ power as the ability to inducing demand, which is encouraged by the lower revenues (market revenues now have to be split to a higher number of health providers). The inducement of demand is a simple way to physicians reaches the desired amount of income and can be done through an additional appointment, a surgery that is not strictly necessary or through extra examinations. Despite the advantages of this practice it has some disadvantages too. One of them has to do with the fact that the patient has the final decision, so in the case of the sick person perceives the physician behavior as a way to earn money through not need treatments, the patient will not do the treatment with that doctor as will damage his reputation and the number of people willing to see that physician will decrease. Besides this implication, the violation of the ethic code will also damage the doctor reputation and his credibility among the other doctors. Despite the monetary incentive to induce demand, time is a discourage one, because to give a proper answer to a higher number of patients the physician has to spend more time working which at some point decreases the willingness to do the demand inducement.

An example of how the inducement of demand can have serious outcomes is the case of Dr. Mehmood M. Patel, a cardiologist of Louisiana, USA that was sentenced for performing unnecessary medical procedures. In this specific case the doctor had a sentence of 10 years in Federal Prison as several fines for falsifying patient symptoms and had made unnecessary coronary procedures[1]. Through this case it is possible to conclude that when balancing the financial benefits with the risk and despite the information advantage of the physician, it is a bad move induce demand. Besides that, a demand increase today will represent a demand decrease tomorrow.

 

 

 

 

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Author: studentnovasbe

Master student in Nova Sbe

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