THE RISING PRICE OF PHYSICIANS' SERVICES.

This paper has shown that the aggregate pricing and use of physicians' services can be understood best by assuming that permanent excess demand prevails. Sheltered by this excess demand, physicians have discretionary power to vary both their prices and the quantity of services which they supply. There appears to be a tendency to increase prices when patients' ability to pay improves through higher income or more complete insurance coverage. More than a third of the potential gain from improved insurance coverage has been dissipated by these induced price increases. The supply equation provides evidence that physicians reduce the quantity of services provided when fees rise. This dominance of the income effect over the substitution effect implies that government policies to restrain price inflation may increase excess demand but will not decrease and may even increase the quantity of physicians' services provided. Another surprising result, supported by both the price and supply equations, is that greater use of paramedical personnel and supplies has not decreased the cost and price of physicians' services. Although this may be due to higher quality, it is a warning against carelessly assuming that policies to encourage physicians to use more inputs will help limit the inflation of physicians' fees. Both the supply and price equations also indicate that increased government provision of medical services has decreased the quantity of private practice services and raised their price. Among the by-products of estimating these behavioral relations are revised estimates of the rates of increase of physicians' fees, output and productivity. In comparison to the CPI "customary price" index of physicians' fees which rose at 3.2 per cent annually from 1948 to 1966, the average price index described in section II rose at 4.1 per cent. The growth of output per physician was therefore revised to 1.9 per cent annually instead of the 2.8 per cent implied by the CPJ. The proportion of the population covered by physician care insurance rose from 12 per cent in 1948 to 46 per cent in 1966 (an annual rate of 7.9 per cent). The proportion of their bills that the insured paid themselves fell at 2.2 per cent per year. But the average net price of physicians' services did not fall but actually rose at 2.1 per cent annually. It should again be emphasized that the estimates discussed in this paper are based on a rather small sample of quite imperfect data. The conclusions should therefore be treated as preliminary and subject to revision. But they differ sufficiently from the implications of traditional economic analysis and the conventional wisdom of health care experts to indicate the importance of re-examining the basis for future policy toward physicians' services and prices. [ABSTRACT FROM AUTHOR]