HMO Market Structure and Performance: 1985-1995

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Abstract
PROLOGUE:As William Fulbright once observed, “We are handicapped by policies based on old myths rather than current realities.” Although he was speaking in an entirely different context, his words have resonance for the current debates about competition in U.S. health care markets. These debates have borne witness to a struggle between proponents of traditional beliefs about political economy on the one hand and, on the other hand, those who insist that the idiosyncratic nature of U.S. health care markets poses insurmountable obstacles to the salutary effects of competition. The issue is not so much whether competition can help to keep health care costs in check but, rather, precisely how costs are controlled in competitive markets. Douglas Wholey and colleagues present new research on market responses to changing competitive pressures over time.Wholey, who received a doctoral degree in organizational behavior and industrial relations from the University of California, Berkeley, is associate professor of organizations and information systems in the Department of Social and Decision Sciences at Carnegie-Mellon University in Pittsburgh. Jon Christianson is a professor in the Division of Health Services Research and Policy at the University of Minnesota. He earned his doctorate in economics from the University of Wisconsin-Madison. John Engberg, who also earned a doctorate in economics from the University of Wisconsin, is an assistant professor at Carnegie-Mellon's Heinz School of Public Policy and Management. Cindy Bryce is a postdoctoral research fellow at the Veterans Administration Medical Center in Durham, North Carolina. She earned her doctorate in policy analysis from Carnegie-Mellon. This paper estimates the effect of market structure on hospital days and ambulatory visits in independent practice associations (IPAs) and group-model health maintenance organizations (HMOs) where market structure is measured by HMO penetration and the number of HMOs operating in a market. There was a steady decline in inpatient use in HMOs during the study period and a steady increase in use of ambulatory care. In multivariate analyses, inpatient use is significantly higher in IPAs, but there is no difference in ambulatory use. As HMO penetration increases and the number of HMOs increases, group-model HMOs have lower hospital use and greater ambulatory use. In contrast, use of both inpatient and ambulatory care decreases in IPAs but only at high levels of penetration and numbers of competitors.

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