Is Managed Care Still an Effective Cost Containment Device?

In this paper we take a historical perspective to examine the effects of managed care and hospital competition on hospital cost and revenue growth during managed care's boom period (1990-1994), mature period (1995-1999), and backlash period (2000-2003). We find that while higher managed care presence, in particular, HMOs, was effective in slowing down hospital cost and revenue growth during the boom and the mature periods, its cost containment effect diminished during the backlash period. This result is stable under different specifications and sensitivity analyses. Hospital competition effects, however, remain strong throughout the three periods. It appears that hospital competition effects were initially the result of aggressive selective contracting in the high managed care markets, but were later fueled by the less saturated, but growing managed care markets that seemed to catch up with the more developed markets.