NCPA - National Center for Policy Analysis

HMOs Increase Marketplace Competition

May 30, 2001

Researchers agree that Health Maintenance Organizations (HMOs) generally pay lower, negotiated prices to providers than traditional health insurers. But do they do so because they have broken an undesirable monopoly among health care providers? Or does an HMO function as a monopsony -- a buyer of services able to drive prices below competitive levels because sellers must have their business?

Economists say that if HMOs have created a more competitive -- less monopolistic -- marketplace, lower prices should be accompanied by greater utilization of services per enrollee. However, if HMOs exercise market power as a purchaser of health care services, lower prices should be accompanied by lower use of services per enrollee.

Health economists at the University of Minnesota School of Public Health decided to figure out which is the case, using data on the prices HMOs paid for ambulatory care services -- which includes things like physicians' visits -- and inpatient hospital days from 1985 through 1997. Using as a measure of the HMO's buying power the percentage of all hospital days in its enrollment area that the HMO bought, they found:

  • Hospital prices fell by 2.3 percent for every one-unit increase in HMO buying power.
  • And hospital days per member increased by 2.4 percent.
  • However, they found no relationship between HMO buying power and prices or utilization of ambulatory services.

The results suggest that HMOs helped make the marketplace more competitive -- not less. The researchers note that HMOs can leverage fairly small amounts of buying power into large discounts by channeling their patients to particular hospitals.

Source: Roger D. Feldman and Douglas R. Wholey, "Do HMOs Have Monopsony Power?" Research Brief No. 4, April 2001, Division of Health Services Research and Policy, University of Minnesota School of Public Health; International Journal of Health Care Finance and Economics, forthcoming 2001.


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