The income effect and supplier induced demand. Evidence from primary physician services in Norway

A much debated issue within the health economic literature is whether physi cians can induce demand for their services. The relationship between physic ians' 'nonpractice income' and supply of primary physician services in Norw ay is examined. It is argued that, if inducement exists, physicians with a low nonpractice income who work in municipalities where competition for pat ients is high, compensate for lack of patients by inducing demand. This mod el is adapted to the institutional setting of the Norwegian primary physici an services, where there is a fixed fee schedule. The analyses were perform ed on a large set of data, encompassing all primary care physicians in Norw ay who are remunerated per item of treatment. Data on output in practice we re merged with information about nonpractice income from the tax forms of t he physician and her/his spouse. In municipalities with high physician dens ity, nonpractice income had no effect on the number of consultations per ph ysician, or on the number of treatment items per consultation. The results are interpreted as evidence against the inducement hypothesis.