Ruhr Economic Papers

Ruhr Economic Papers #567

Do Hospitals Respond to Increasing Prices by Supplying Fewer Services?

by Martin Salm and Ansgar Wübker

RWI, 07/2015, 35 S./p., 8 Euro, ISBN 978-3-86788-653-6 DOI: 10.4419/86788653



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.

JEL-Classification: I11, L10, L21

Keywords: Physician-induced demand; hospital care; prospective payment