The impact of HMO penetration on the rate of hospital cost inflation, 1985-1993.

Darreil J. Gaskin · Jack Hadley

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Healthcare Policy and Management Health Services Management and Policy Healthcare Systems and Reforms

Abstract

This paper provides evidence that growth in health maintenance organization (HMO) enrollment slows hospital cost inflation. During the period 1985-1993, hospitals in areas with high rates of HMO penetration and growth had a slower rate of growth in expenses (8.3%) than hospitals in low penetration areas (11.2%). From 1992-1993, HMO growth lowered the rate of hospital cost inflation by .34 to 3.40 percentage points, depending on the base-year level and the annual change in HMO penetration. Declines in Medicare Prospective Payment System (PPS) margins also lowered hospital cost inflation; over the time period, annual hospital cost inflation was reduced by .38 percentage points. The estimates imply that the cumulative effect of HMO growth on hospital costs has been a $56.2 billion reduction (in 1993 dollars).

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References

1986Estimating hospital costs 1995A National Survey of the Arrangements Managed-Care Plans Make with Physicians 1995Uncertain demand, the structure of hospital costs, and the cost of empty hospital beds 1996Decline in Hospital Utilization and Cost Inflation Under Managed Care in California 1991‘Profit’ variability in for-profit and not-for-profit hospitals 1994The effect of competitive pressure on charity: Hospital responses to price shopping in California 1991HMO Market Penetration and Hospital Cost Inflation in California 1993A variable-radius measure of local hospital market structure.

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