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Question
Demand Inducement

1. Rice and Unruh (2009) propose two ways in which to assess whether or not physicians can or are inducing demand. The first “test” relates to the number of available physicians and is depicted by the graph below.

a. What is the assumption regarding why physicians would want to induce demand?

b. What is reflected by Lines D0 and S0?

c. What is reflected by Line S1?

d. What is reflected by Line D1?

e. What can you conclude at both Point B and Point C with respect to quantity of physician services demanded? How does this relate to questioning whether or not utilization increases result from physician demand inducement?

f. What can you conclude at both Point B and Point C with respect to the price of physician services? How do price increases or decreases relate to assessing whether or not physician demand inducement has occurred?

g. What happens if you realize you have drawn your demand curve incorrectly and instead it should be drawn as D’?

h. What is omitted variable bias and how does it impact the assessment of whether or not demand inducement has occurred?

2. The second “test” relates to assessing physician payment rates. This is depicted by the graph below.

a. (Note this is a theoretical question to start and not specifically related to the graph). Without demand inducement, what would you expect to happen to the quantity of services provided by physicians if payment declines? How might this compare if demand inducement was in effect?

b. In the graph above, what is the difference between this proposed supply curve and a traditional supply curve?

c. Why might physicians have a backward bending supply curve?

d. Explain what is happening as we move from Point A to B.

e. Explain what is happening as we move from Point C to Point D?

f. Explain what is happening if we move from Point D to Point C?

g. What do we mean by labor-leisure trade off?

h. Using the graph below, describe the differences in Point A, B, and C.

i. What implications does this have for assessing whether or not demand inducement is associated with payment rates?

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