Does an increase in the doctor supply reduce medical fees? An econometric analysis of medical fees across Australia

Abstract

One of the clearest predictions of economic theory is that an autonomous increase in supply will depress the price which equilibriates supply and demand. However, US evidence with respect to medical fees has been perverse: higher fees have been observed in areas with more doctors even after standardizing for other relevant variables. This has resulted in two broad responses. Some have invoked the (once) controversial theory of supplier-induced demand to account for the anomaly. Others have suggested ingenious ways of explaining the results within the orthodox framework in which supply and demand are independent. There has been almost no analysis of price formulation in the Australian medical market. It has been generally assumed that the usual supply–demand relationships apply in the Australian context, and that perversity in the US is attributable to US-specific market characteristics. The present article examines the setting of GP fees in the Australian market using 1995 cross-section data from statistical sub-divisions. The implications of the results for workforce planning and for the analysis of consumer benefits are discussed.