The Norms Hypothesis and the Demand for Medical Care

by Joseph P. Newhouse, M. Susan Marquis


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The "norms hypothesis," adopted by some researchers in the health care fields, holds that physicians treat patients according to the average or modal insurance coverage in an area, and not on the basis of individual patient's coverage. If the hypothesis is true, a demand equation estimated from a cross section of patients with different insurance will understate the effect of health insurance legislation (e.g., a national health insurance plan) that changes the average coverage. The authors argue that (1) the single study in the literature supporting the norms hypothesis is suspect in its specification, and (2) when a theoretically more appropriate specification is used, the results give no support to the hypothesis.

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