Mind the information gap: Fertility rate and use of cesarean delivery and tocolytic hospitalizations in Taiwan

Background: Physician-induced demand (PID) is an important theory to test given the longstanding controversy surrounding it. Empirical health economists have been challenged to find natural experiments to test the theory because PID is tantamount to strong income effects. The data requirements are both a strong exogenous change in income and two types of treatment that are substitutes but have different net revenues. The theory implies that an exogenous fall in income would lead physicians to recoup their income by substituting a more expensive treatment for a less expensive treatment. This study takes advantages of the dramatic decline in the Taiwanese fertility rate to examine whether an exogenous and negative income shock to obstetricians and gynecologists (ob/gyns) affected the use of c-sections, which has a higher reimbursement rate than vaginal delivery under Taiwan's National Health Insurance system during the study period, and tocolytic hospitalizations. Methods: The primary data were obtained from the 1996 to 2004 National Health Insurance Research Database in Taiwan. We hypothesized that a negative income shock to ob/gyns would cause them to provide more c-sections and tocolytic hospitalizations to less medically-informed pregnant women. Multinomial probit and probit models were estimated and the marginal effects of the interaction term were conducted to estimate the impacts of ob/gyn to birth ratio and the information gap. Results: Our results showed that a decline in fertility did not lead ob/gyns to supply more c-sections to less medically-informed pregnant women, and that during fertility decline ob/gyns may supply more tocolytic hospitalizations to compensate their income loss, regardless of pregnant women's access to health information. Conclusion: The exogenous decline in the Taiwanese fertility rate and the use of detailed medical information and demographic attributes of pregnant women allowed us to avoid the endogeneity problem that threatened the validity of prior research. They also provide more accurate estimates of PID.