Medical insurance and physician-induced demand in China: the case of hemorrhoid treatments

In October 2015, the Guangdong government of China enacted a so-called unified medical insurance payment for patients residing in Guangdong province, which fundamentally simplifies reimbursement procedures of medical insurance for the involved cross-city in-patients. Using a unique confidential dataset from 2013 to 2018 on hemorrhoid treatments at a renowned hospital in Guangzhou, the provincial capital of Guangdong, and exploiting difference-in-differences estimations based on the abovementioned policy, we document that the physicians’ incentives are a negative externality of the full medical insurance policy for cross-city in-patients and account for a 49% probability increase in improper treatments; and neither increasing the communication between physicians and patients nor enhancing the education level of patients reduces the physician-induced demand for improper treatments. A series of robustness tests indicate our findings are solid. In summary, we highlight the substantial roles of medical insurance as a driver of physician-induced demand in an emerging economy such as China.