John Nyman’s The Theory of Demand for Health Insurance includes this passage on the physician’s influence on the substitutability of medical care for other goods and services:
[T]he involvement of the consumer’s physician [in health care decision making] also constrains the consumer’s choice set and as a result, eliminates some of the consumer’s [possible] responses to the price reduction [effect of insurance]. In effect, the physician is able to impose a lower degree of substitutability between health care and other commodities than actually exists for the insured consumer.
Consider, for example, a hospital stay. Hospitals provide health care, but they also provide food and housing services. Thus, for a consumer who is traveling, there is a degree of substitutability between a stay in a hotel and a stay in a hospital. If the decision were left entirely to the consumer, insurance may reduce the relative price of a hospital stay sufficiently so that the consumer may desire to substitute a stay in the hospital for a stay in a hotel. This does not occur, however, because a hospital stay must be ordered by a physician, and physicians (at least in theory) only order hospital stays for those who are ill. Therefore, one of the important roles of the physician is to reduce the degree of substitutability between health care and non-health-care-related uses for health care. This role is also manifested in consumers not being able to obtain some prescription drugs (e.g., narcotics, barbiturates, steroids, etc.) or some medical care (e.g., surgical interventions for those who are not obese but want to weigh less, counseling for those who lack a mental health diagnosis, etc.) without the physician’s consent.
Reading this, it struck me how accustomed I’ve become to viewing physician’s only as a source of cost and not as a source of savings. Of course, they can and do play both roles, and this passage emphasizes the latter.
