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Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans

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  • Daniel Altman
  • David M. Cutler
  • Richard Zeckhauser

Abstract

We examine why managed care plans are less expensive than traditional indemnity insurance plans. Our database consists of the insurance experiences of over 200,000 state and local employees in Massachusetts and their families, who are insured in a single pool. Within this group, average HMO costs are 40 percent below those of the indemnity plan. We evaluate cost differences for 8 conditions representing over 10 percent of total health expenditures. They are: heart attacks, cancers (breast, cervical, colon, prostate), diabetes (type I and II), and live births. For each condition, we identify the portions of the cost differential arising from differences in treatment intensity, enrollee mix, and prices paid for the same treatment. Surprisingly, treatment intensity differs hardly at all between the HMOs and the indemnity plan. That is, relative to their fee-for-service competitor, HMOs do not curb the use of expensive treatments. Across the 8 conditions, roughly half of the HMO cost savings is due to the lower incidence of the diseases in the HMOs. Virtually all of the remaining savings come because HMOs pay lower prices for the same treatment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7832.

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Date of creation: Aug 2000
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Publication status: published as Altman, Daniel & Cutler, David & Zeckhauser, Richard, 2003. "Enrollee mix, treatment intensity, and cost in competing indemnity and HMO plans," Journal of Health Economics, Elsevier, vol. 22(1), pages 23-45, January.
Handle: RePEc:nbr:nberwo:7832

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  1. Ellis, Randall P, 1989. "Employee Choice of Health Insurance," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 215-23, May.
  2. Altman, Daniel & Cutler, David M & Zeckhauser, Richard J, 1998. "Adverse Selection and Adverse Retention," American Economic Review, American Economic Association, vol. 88(2), pages 122-26, May.
  3. Sarah Feldman & David Scharfstein, 1998. "Managed Care Provider Volume," NBER Working Papers 6523, National Bureau of Economic Research, Inc.
  4. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
  5. David M. Cutler & Richard J. Zeckhauser, 1998. "Adverse Selection in Health Insurance," NBER Chapters, in: Frontiers in Health Policy Research, volume 1, pages 1-32 National Bureau of Economic Research, Inc.
  6. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
  7. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1998. "Are Medical Prices Declining? Evidence From Heart Attack Treatments," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 991-1024, November.
  8. Cutler, David M & McClellan, Mark & Newhouse, Joseph P, 1998. "What Has Increased Medical-Care Spending Bought?," American Economic Review, American Economic Association, vol. 88(2), pages 132-36, May.
  9. David M. Cutler & Mark McClellan & Joseph P. Newhouse, 2000. "How Does Managed Care Do It?," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 526-548, Autumn.
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Cited by:
  1. David M. Cutler & Bryan Lincoln & Richard J. Zeckhauser, 2009. "Selection Stories: Understanding Movement Across Health Plans," NBER Working Papers 15164, National Bureau of Economic Research, Inc.
  2. David Bardey & Jean-Charles Rochet, 2010. "Competition Among Health Plans: A Two-Sided Market Approach," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 435-451, 06.
  3. Rudy Douven, 2000. "Regulated competition in health insurance markets," CPB Research Memorandum 171, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Karen Eggleston & Anupa Bir, 2009. "Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 159-175.
  5. Ronen Avraham & Leemore S. Dafny & Max M. Schanzenbach, 2009. "The Impact of Tort Reform on Employer-Sponsored Health Insurance Premiums," NBER Working Papers 15371, National Bureau of Economic Research, Inc.
  6. David J. Cooper & James B. Rebitzer, 2002. "Managed Care, Physician Incentives, and Norms of Medical," Microeconomics 0209001, EconWPA.
  7. Henke, Klaus-Dirk & Rich, Robert F. & Steinbach, Axel & Borchardt, Katja, 2004. "Auf dem Wege zu einer integrierten Versorgung: Neue sozialrechtliche Rahmenbedingungen unter Ber├╝cksichtigung der Erfahrungen aus den USA und am Beispiel Berlins," Discussion Papers 2004/12, Technische Universit├Ąt Berlin, School of Economics and Management.
  8. David J. Cooper & James B. Rebitzer, 2002. "Managed Care, Physician Incentives, and Norms of Medical Practice: Racing to the Bottom or Pulling to the Top?," Economics Working Paper Archive wp_353, Levy Economics Institute.
  9. David J. Cooper & James B. Rebitzer, . "Physician Incentives In Managed Care Organizations: Medical Practice Norms and the Quality of Care," Economics Public Policy Brief Archive ppb_70, Levy Economics Institute.

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