Do Hospitals Respond to Increasing Prices by Supplying Fewer Services?

37 Pages Posted: 6 Aug 2015

See all articles by Martin Salm

Martin Salm

Tilburg University; IZA Institute of Labor Economics

Ansgar Wübker


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Date Written: July 5, 2015


Medical providers often have a significant influence on treatment decisions which they can use in their own financial interest. Classical models of supplier-induced demand predict that medical providers will supply fewer services if they face increasing prices. We test this prediction based on a reform of hospital financing in Germany. Uniquely, this reform changed the overall level of reimbursement – with increasing prices for some hospitals and decreasing prices for others – without affecting the relative prices for different types of patients. Based on administrative data, we find that hospitals do indeed react to increasing prices by reducing service supply.

Keywords: Physician-induced demand; hospital care; prospective payment

JEL Classification: I11, L10, L21

Suggested Citation

Salm, Martin and Wübker, Ansgar, Do Hospitals Respond to Increasing Prices by Supplying Fewer Services? (July 5, 2015). Available at SSRN: or

Martin Salm

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072

Ansgar Wübker (Contact Author)

RWI ( email )

Hohenzollernstr. 1-3
Essen, 45128

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