The Impact of Physician Supply on the Healthcare System: Evidence from Japan's New Residency Program

Using a 2004 Japanese natural experiment affecting physician supply, we study the physician labor market and its effects on hospital exits and health outcomes. Although physicians play a central role in determining the performance of a healthcare system, identifying their impacts are difficult because physician supply is endogenously determined. We circumvent the problem by exploiting an exogenous shock to physician supply created by the introduction of a new residency program – our natural experiment. Based on panel data covering all physicians in Japan, we find that the introduction of a new residency program substantially decreased the supply of physicians in some rural markets where local hospitals had relied on university hospitals for filling physician positions. We also find that physician market wages increased in the affected markets relative to less affected markets. Finally, we find that this change in physician market wages forced hospitals to exit affected markets and negatively affected patient health outcomes in those markets. These effects may be exacerbated by the fact that the healthcare market was rigidly price‐regulated. Copyright © 2015 John Wiley & Sons, Ltd.