Chapter 5: Problems
2. Carefully define physician-induced demand. Can it be explained by the Isle mount of ineffective and inappropriate care? Why or why not?

Physician-induced demand means that a portion of health care purchases may reflect physician preferences. This can occur because of consumers' lack of information about the effectiveness of various health care alternatives. Thus, they delegate the choice of alternatives to their physician. The physician, motivated by the self4nterest of increasing his or her income, may prescribe care that provides benefits to the consumer that are less than the costs of providing that care.

While there is some evidence of ineffective health care, there is little of it that can be attributed to physician-induced demand. Research shows that as much as 1/3 of certain common procedures are inappropriate or of equivocal value. Other research shows that there is enormous variation in the use of care in different areas of the country or across countries. Most of this is due to variations in physician practices. Differences in practices could be caused by the uncertainty of diagnostic medicine and variations in the training and skills of physicians.

Economists have also identified several potential limits to the exercise of physicians' preferences. First is the inability of physicians to close the market to competitors. This threat of potential competitors works to mitigate the market power of physicians. Second is the possibility that patients form a pdod expectations about the conditions for which they seek medical assistance. If the procedures suggested by physicians deviate significantly from these expectations, patients are likely to seek second opinions. The growing practice of third-party payers to require second opinions also reduces the likelihood of physician-induced demand. Finally, there may be a limit to the umount of work that physicians want to create for themselves.

3. “Defensive medicine is one of the primary causes of excessive health care spending.” Answer true or false and justify your answer.

The U.S. legal system provides compensation to patients who can prove that they have been victims of medical matpractice, deviations from accepted medical standards of care that cause injury to the patient. In some instances, physicians may perform medical procedures in order to decrease the risk of a malpractice suit rather than because of the benefit that such a procedure provides a patient. Thus we may find the marginal cost of health services exceeding the marginal benefits. However, the existence of defensive medicine does not necessarily imply excessive health care spending. It may result in higher quality care, fewer injuries, or a reduction in the number of high-risk procedures. In fact, the most widely cited estimate does not support the idea of defensive medicine being a primary cause of excessive health care spending. According to this statistic, defensive medicine accounted for only about 1 percent of all medical expenditure in 1984.

4. “Technological change can explain a lot of the growth in health care costs, but little of the excessive spending that takes place.” Do you agree? Why or why not?

Technological change in the hospital sector has been driven by the competition for patients. Because doctors are the ones who admit patients to hospitals, there has been fierce competition for doctors among hospitals. In this competition, hospitals have lured doctors by adopting the latest technology. Because of partial-cost payments, it is likely that some of the care provided with the aid of new technology is wasteful. However, this is not due to technology per se, but due to the way hospitals are reimbursed for their services. Besides, consumers may be willing to pay for the latest technology. While there may be excess capacity of equipment in larger metropolitan areas, it is unlikely that technological change can explain a large part of excessive growth in health care spending.
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