Chapter 15 The Physician’s Practice A Benchmark model of the Physician’s Practice Supplied-induced demand (SID) Small area variation (SAV)

A Benchmark Model of the Physician’s Practice McGuire & Pauly (1981) U=U(phi, L, I) where Net income (phi), Leisure(L) and Inducement (I) Trade off in three Goals (1) Income and Leisure Backward-bending supply curve (Figure 15-1) (2) Income (Good) and inducement (Bad) Lower profit rate=> net income line more flatter and lower=>inducement increase (Figure 15-2) (3) Leisure and Inducement

Supplier-Induced demand SID suggests that health care providers have and use their superior knowledge to influence demand, taking advantage of “information gap”. Physician as a dual role of advisor and provider Figure 15-3 1. Increase supply (constant demand): P1->P2(decreasing); Q1->Q2 2. shift in demand to :D3 (Reinhart: SID; Feldman& Sloan: quality) P1->P3 (increasing)

The target income hypothesis Evan (1974): Physicians have desired income that they want to achieve or restore whenever actual income falls below target income. Evidence (Rizzo& Blumenthal, 1996; Rizzo& Zeckhauser, 2003) Physicians choose different and more profitable price and quality combination whenactual income falls below target income.

A synthesis of the two models The McGuire-Pauly synthesis (1991) tells us the size of the income effect is critical to understanding an identifying SID behavior. A lower profit rate m has two offsetting effects on inducement: (1)Substition effect-if inducement is less profitable (smaller m), providers would be do less inducement, or substitute away from it; (2) Income effect-decrease income would make inducement more desirable.

The Benchmark as a Synthesis In panel A, the new equilibrium, once competition forces the profit rate m to a lower rate, m’, is tangency point E2 (IE1->IE2’: income effect; IE2’->IE2: substitution effect)=> increasing influence on patient demand Panel B shows the contrasting profit-maximizing behavior (Income effect=0: IE1=IE2’)=>reducing inducement

The parallel between inducement and Advertising Hard to identify: Promotion practice can include advertising but can also include quality enhancement , provision of information but information may be none or fraudulent Stano (1987): if SID is analogous to advertising/inducement, then inducement would usually decline in an increasing competitive market=> competition is socially benign Small Area Variation (SAV)

Small Area Variation (SAV) Whereas SID stems from the information gap between physicians and patients, small area variation probably occur because of physician’s uncertainty and ignorance. Even if all physicians acted as perfect agents for their patients, their own ignorance of the true productivities of available procedure creates welfare loss for the patients. Modern SAV research stems from the pioneering work of Wennberg et al. Their evidence of wide variations across service was corroborated by later studies such as why women in one New England town undergo hysterectomies at more than twice the rate of another, apparently similar. Wennberg (1984) argued that much of the observed variation is closely related to the degree of uncertainty with respect to diagnosis and treatment. Much of SAV work has gone into discovering the contributions of such variables as socioeconomic characteristics of the population, and the role of the availability of supplies of hospital services and physician services.

Measuring The Variations: The CV and SAV Coefficient of Variation (CV): the ratio of measure of the spread (e.g. standard deviation) of observed medical use rates across the small areas in the study region, to the mean of the same measure. Systematic component of variation (SCV): the observed treatment rate that portion of its variation that naturally be attributed to the random nature of disease. The remaining portion might then become a better measure of the systematic effect of factors such as physician practice habits, and supply and demand factors.

Contributions to these variations Much of the SAV work focuses on the contributions of socioeconomic characteristics of the population and role of the availability of suppliers. (see Alexander et al. 1999) Folland and Stano (1990) (1)Supply variables are important and demand characteristics play a somewhat lesser role (2) such variables do not seem to suffice Weinberg (1984) argues the degree of physician uncertainty=> the physician practice style hypothesis (e.g. follow the pack; optimistic)