Increased medical expenditures for the elderly have become a social
problem in Japan. One of the most powerful arguments to explain this increase is
the physician-induced demand hypothesis. In this article, we adopt the
expenditure function approach to examine the physician-induced demand
hypothesis. In this approach, the improvement of health due to medical treatment
is adjusted in the model and the nonvalid use of medical services can be
measured. Furthermore, we allow for the possibility of substitution between
hospital services and outpatient care. A change in the physician-population ratio
may lead to a change in the ratio of inpatient service to outpatient care, and this
may result in the medical expenditure. Therefore, to determine the degree of the
reflection, we have allowed for the possibility of the substitution. We conclude
that when the number of physicians per capita increases, the use of inpatient
services and of outpatient services increases with statistical significance,
respectively. The substitution between hospital services and outpatient services
also exists. Moreover, the demand for inpatient or outpatient services is
significantly influenced by the self-payment price.
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