ABSTRACT
This chapter begins by modeling the physician’s practice as a monopolistically competitive firm. The reader learns that within the context of this market structure, the physician often acts as the patient’s agent, and this leads to the theoretical challenge of modeling potential supplier-induced demand (SID), where physicians may violate their agency roles by encouraging consumer demand to increase the profitability of their practices. The development of improved analyses has led to richer models in which the physician derives utility from profits but also disutility from inducing demand and losing leisure time when providing additional services. The physician-firm faces a larger set of trade-offs that have made it difficult to estimate the extent of SID. Health economists have found that utilization constraints associated with managed care and other third-party payers have recently reduced the role of SID.
The chapter includes two other major topics. First, wide geographic variations in the utilization rates of many medical and surgical procedures have been observed for many decades. Health economists have attempted to determine the sources of these variations and how much of the variations can be explained by economic variables. Second, hospitals and private equity acquisitions of physician practices have grown quickly. The chapter examines the extent and effects of these trends.
