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How do HMOs affect health care costs?
Many recent health-care reform proposals seek to reduce health-care expenditures by shifting the delivery of services toward managed-care organizations like HMO's. [ Proponents of HMO's often emphasize their ability to contain costs through oversight of physicians' decisions or by implementation of a capitated payment scheme that aligns physicians' incentives with those of the healthcare plan.
Indeed, existing evidence suggests that HMO's do have lower hospitalization rates and shorter hospital stays and also use fewer expensive tests and procedures than traditional health-care providers (see e.g., R. H. Miller and H. S. Luff, 1994). Some proponents also argue that the increasing prominence of managed care generates positive externalities that benefit consumers enrolled in non-HMO health plans. This argument typically invokes some notion of market discipline, arguing that traditional insurers or health-care providers will have to lower premiums to remain viable in a health insurance market made "more competitive" by the presence of managed-care plans. From these arguments, one could construct a strongly positive view of HMO's, which holds that their presence unambiguously improves consumer welfare by providing more efficient and lower-priced care to those who enroll in HMO's, while also forcing non-HMO plans to lower their premiums.[1] However, there remains considerable debate about the sources of cost savings generated by HMO's. Some critics claim that HMO's have lower costs and reduced utilization rates simply because they enroll consumers who are healthier than average, which only shifts costs from HMO's to traditional insurers. Further, HMO enrollees may not fully benefit from the lower costs if the HMO market is not sufficiently competitive. In the absence of competition, HMO's may "shadow price" traditional insurers--setting premiums that are just below traditional insurance premiums but which do not fully reflect their lower costs (e.g., Roger B. Feldman and Bryan Dowd, 1991). ]
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