Supply-induced demand in the private health-care sector: Theoretical considerations

Research Note 40, November 2016

Recently announced increases to medical scheme premiums were met with great surprise by many medical scheme members, who now have to absorb some of the highest premium increases of the past few years. Both the Government Employees Medical Scheme (GEMS) and Discovery Health have made statements in the popular press, suggesting that (amongst other factors) an increase in the supply of private hospital beds is to blame.

Given Econex’s interest and previous research investigating the drivers of utilisation in the South African private healthcare market, this note approaches the concept of supply-induced demand (SID) from an academic perspec-tive. The focus is on the relevant economic theory and theoretical considerations if one were to attempt measur-ing this phenomenon.

It is shown that a clear definition and explanation of how SID is hypothesised to operate in the local market are key to designing an econometric model to measure its effect on utilisation and costs. The economic literature further highlights the importance of correctly defining the market/ sample used for the study of SID, as well as the importance of identifying and controlling for the initial state of the market (i.e. whether demand and supply are in equilibrium to begin with) before measuring SID. Finally, we discuss that proving causation and including the relevant statistical controls in such a measurement exercise would be crucial for the final results obtained.

This research note therefore argues that, in measuring SID, a comprehensive understanding of the phenomenon and a robust econometric model are required, especially if results are to be used for policy formation.

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