The Competitive Effects of Health Maintenance Organizations
Krueger, Joan Alice
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https://hdl.handle.net/2142/71525
Description
Title
The Competitive Effects of Health Maintenance Organizations
Author(s)
Krueger, Joan Alice
Issue Date
1987
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
The rising cost of health care is a serious problem in the United States today. This thesis examines the competitive effect of Health Maintenance Organizations (HMOs) on traditional providers of health care as a mechanism for cost control. First, a theoretical foundation for addressing the issue is provided. Three models of health care providers are developed: a dynamic model of an HMO; a model of a hospital providing services on a cost-based retrospective basis; and a hospital providing services to both charge-paying and cost-paying patients. From these models, two hypotheses emerge: (1) an increase in HMO presence in a market will lead to a decrease in hospital expenses; and (2) as HMO presence increases, the mix of hospital services provided will change, with a decrease in hospital inpatient utilization, and more reliance on less expensive ambulatory care.
These hypotheses are tested using data from 1976 to 1982 from 295 Standard Metropolitan Statistical Areas (SMSAs). A simultaneous system of equations is specified which captures the interrelationships between the determinants of HMO location and hospital expenses and utilization. The first structural equation explains the factors which determine HMO location and the remaining equation(s) focuses on the determinants of hospital expenses and utilization. The models are estimated using three-stage least squares.
The results from the estimation support the hypothesis that HMOs have a competitive impact on hospital expenses and utilization. The primary result is a significant and negative relationship with patient days and admissions per 1000 population, the desired competitive response. A positive relationship is found between HMO presence and both average length of stay and expenses per admission, which is consistent with the reduction in days and admissions. Results also show that HMOs have been successful in slowing the rate of increase in expenses per day. Finally, PPGs and IPAs were shown to have similar effects on hospital expenses and utilization.
These results suggest that HMOs can be effective in decreasing total expenses and utilization and thus should be a part of any public policy aimed at reducing health care costs.
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