Supplier induced demand has become a common phrase for health policy wonks. Yet this phenomenon was first discovered by Milton Roemer when he investigated how the number of hospital beds per capita affected hospitalization rates. According to the Dartmouth Atlas Project, Roemer’s law can be stated as follows:
“Supply may induce its own demand where a third party practically guarantees reimbursement of usage.”
In his research Roemer found higher hospitalization rates in regions where the number of hospital beds per capita were higher. The length of hospital stays was also longer in regions with a higher supply of hospital beds.
One problem in this finding is that it could be the case that hospital stays are shorter in lower hospital bed per capita regions because of a deficit in supply (reverse causation). An increased number of beds may be due to patient preference for in-patient (rather than outpatient) care in a region. While Roemer’s law may not be entirely convincing, the finding of a strong correlation between that areas with above average supply of medical services and profligate utilization of these services is robustly shown empirically.