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The Effects of HMOs on Conventional Insurance Premiums: Theory and Evidence

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  • Laurence C. Baker
  • Kenneth S. Corts

Abstract

We develop a model of imperfectly competitive insurers that compete with HMOs for consumers who have private information about their health status. We illustrate two conflicting effects of increasing HMO activity on conventional insurance premiums. We term these effects market discipline -- HMO competition may limit the ability of insurers to exercise market power, thus driving prices down -- and market segmentation -- HMOs may skim the healthiest patients, thus driving insurers' costs and prices up. We empirically examine the relative importance of these effects using data from a firm-level survey that provides data on premiums, together with market-level measures of HMO activity. Our results suggest that the market segmentation effect is important, and that increases in HMO activity may increase insurance premiums.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5356.

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Date of creation: Nov 1995
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Publication status: published as American Economic Review, Paper and Proceedings, Vol. 86, no. 2, 1996, pp. 389-94
Handle: RePEc:nbr:nberwo:5356

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  1. Laurence C. Baker, 1995. "HMOs and Fee-For-Service Health Care Expenditures: Evidence from Medicare," NBER Working Papers 5360, National Bureau of Economic Research, Inc.
  2. David Cutler, 1994. "Market Failure in Small Group Health Insurance," NBER Working Papers 4879, National Bureau of Economic Research, Inc.
  3. Noether, Monica, 1988. "Competition among hospitals," Journal of Health Economics, Elsevier, Elsevier, vol. 7(3), pages 259-284, September.
  4. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, Elsevier, vol. 88(2), pages 227-250, November.
  5. Feldman, Roger & Dowd, Bryan, 1991. "Must adverse selection cause premium spirals?," Journal of Health Economics, Elsevier, Elsevier, vol. 10(3), pages 349-357, October.
  6. William E. Encinosa & David E. M. Sappington, 1997. "Competition among Health Maintenance Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 6(1), pages 129-150, 03.
  7. Newhouse, Joseph P., 1984. "Cream skimming, asymmetric information, and a competitive insurance market," Journal of Health Economics, Elsevier, Elsevier, vol. 3(1), pages 97-100, April.
  8. John Bound & David A. Jaeger & Regina Baker, 1993. "The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0137, National Bureau of Economic Research, Inc.
  9. Charles E. Phelps, 1992. "Diffusion of Information in Medical Care," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(3), pages 23-42, Summer.
  10. Pauly, Mark V., 1984. "Is cream-skimming a problem for the competitive medical market?," Journal of Health Economics, Elsevier, Elsevier, vol. 3(1), pages 87-95, April.
  11. van de Ven, Wynand P. M. M. & van Vliet, ReneC. J. A., 1995. "Consumer information surplus and adverse selection in competitive health insurance markets: An empirical study," Journal of Health Economics, Elsevier, Elsevier, vol. 14(2), pages 149-169, June.
  12. Feldman, Roger & Dowd, Bryan, 1986. "Is there a competitive market for hospital services?," Journal of Health Economics, Elsevier, Elsevier, vol. 5(3), pages 277-292, September.
  13. Marquis, M. Susan, 1992. "Adverse selection with a multiple choice among health insurance plans: A simulation analysis," Journal of Health Economics, Elsevier, Elsevier, vol. 11(2), pages 129-151, August.
  14. Lewis Tracy R. & Sappington David E. M., 1995. "Insurance, Adverse Selection, and Cream-Skimming," Journal of Economic Theory, Elsevier, Elsevier, vol. 65(2), pages 327-358, April.
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Cited by:
  1. Baker, Laurence C., 1997. "The effect of HMOs on fee-for-service health care expenditures: Evidence from Medicare," Journal of Health Economics, Elsevier, Elsevier, vol. 16(4), pages 453-481, August.
  2. Laurence C. Baker & Martin L. Brown, 1997. "The Effect of Managed Care on Health Care Providers," NBER Working Papers 5987, National Bureau of Economic Research, Inc.
  3. Eliasson, Gunnar & Eliasson, ├ůsa, 2004. "Competence in Health Care - An Industrial Systems Analysis Using Competence Bloc Theory to Compare European and US Health Care," Ratio Working Papers, The Ratio Institute 46, The Ratio Institute.
  4. Martha A. Starr & R. Forrest McCluer, 2014. "Prices and Quantities in Health Care Antitrust Damages," Working Papers, American University, Department of Economics 2014-03, American University, Department of Economics.

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