Supply-induced demand for medical services under price regulation: Evidence from hospital expansion in China

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In 2009, China launched a nationwide reform to overhaul its enormous healthcare system. Subsequently, government spending on healthcare increased significantly. Simultaneously, public hospitals experienced rapid expansion. This study empirically examines whether supply-induced demand existed for public hospitals during the expansion process, based on hospital longitudinal data from 2007 to 2016, which is matched with individual patient data. We found that medical expenditure increased rapidly, while the quality of medical services did not change significantly during the hospital expansion. In addition, due to the price regulation of medical services, public hospitals mainly passed on the costs of expansion by inducing hospitalization and diagnostic over-testing. Furthermore, supply-induced demand was more obvious in diseases for which doctors had more asymmetric information. Based on the evidence provided in this study, the expansion of public hospitals has resulted in a waste of healthcare resources and a rise in the healthcare burden on patients. This has certain implications for further deepening the reform of public hospitals.