Do Hospitals Respond to Increasing Prices by Supplying Fewer Services?
37 Pages Posted: 6 Aug 2015
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
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