Do Hospitals Respond to Increasing Prices by Supplying Fewer Services?

39 Pages Posted: 4 Sep 2015

See all articles by Martin Salm

Martin Salm

Tilburg University; IZA Institute of Labor Economics

Ansgar Wübker


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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?. IZA Discussion Paper No. 9229, Available at SSRN:

Martin Salm (Contact Author)

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

RWI ( email )

Hohenzollernstr. 1-3
Essen, 45128

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