The income effect and supplier induced demand. Evidence from primary physician services in Norway

Abstract

A much debated issue within the health economic literature is whether physicians can induce demand for their services. The relationship between physicians' ‘nonpractice income’ and supply of primary physician services in Norway is examined. It is argued that, if inducement exists, physicians with a low nonpractice income who work in municipalities where competition for patients is high, compensate for lack of patients by inducing demand. This model is adapted to the institutional setting of the Norwegian primary physician services, where there is a fixed fee schedule. The analyses were performed on a large set of data, encompassing all primary care physicians in Norway who are remunerated per item of treatment. Data on output in practice were merged with information about nonpractice income from the tax forms of the physician and her/his spouse. In municipalities with high physician density, nonpractice income had no effect on the number of consultations per physician, or on the number of treatment items per consultation. The results are interpreted as evidence against the inducement hypothesis.

Primary physicians’ response to changes in fees

“…Our results are also consistent with the findings from an earlier panel data study of primary physician services in Norway [21] The findings are also consistent with the results of other studies of primary physician 13 services in Norway in which cross-sectional data have been used [29][30][31][32]. A main finding in these studies is that increased competition (more physicians per capita) leads to lower physician income.…”

“…They found that non-practice income had no effect on the number of treatment items per consultation. The results from the present study, which employs panel data rather than cross-sectional data, support the results from the study of Grytten et al [31].…”

“…A main finding in these studies is that increased competition (more physicians per capita) leads to lower physician income. Grytten et al [31] studied the income effect by exploring the relationship between non-practice income and the number of treatment items per consultation using a cross-sectional data set, which encompassed nearly the whole population of contract physicians in Norway. They found that non-practice income had no effect on the number of treatment items per consultation.…”

Do Treatment Decisions Depend on Physicians' Financial Incentives?

“…The consumer price index is included for comparison. 9 We see that the basic consultation fee has not quite caught up with consumer prices, whereas the additional consultation fees, both for prolonged consultations and 7 Of course, if individuals move to another municipality they are also allowed to switch GP across municipalities. 8 The residual …ve percent of the GPs are basically publicly employed with regular salary contracts.…”

“…However, later studies reveal more mixed …ndings. For example, a series of papers on Norwegian data (Grytten et al, 1995;2001;Carlsen et al, 2003Carlsen et al, , 2011 report little or no evidence of SID.…”