Competition and supplier‐induced demand in a health care system with fixed fees

The present paper examines whether supplier‐induced demand exists for primary physician services in Norway. The research design is adapted to the institutional setting of Norwegian primary physician services, where there is a fixed fee schedule. More than 50% of primary care physicians receive a payment for treatment from the National Insurance Administration on a fee‐for‐item basis. The results showed that increased competition, measured as a high physician:population ratio, led to a decline in the number of consultations per contract physician. However, the contract physicians in high physician density areas did not compensate for the lack of patients by providing more items of treatment in order to maintain their income. Contract physicians’ revenue from items of treatment per consultation were unaffected both by physician density and by the number of consultations per contract physician. These results are further corroborated by data that showed that contract physicians’ gross revenue and profits were declining functions of physician density. This paper argues that, from an efficiency point of view, a deregulated health care market with fixed fees may operate well. Copyright © 1999 John Wiley & Sons, Ltd.