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Enrollee mix, treatment intensity, and cost in competing indemnity and HMO plans

  • Altman, Daniel
  • Cutler, David
  • Zeckhauser, Richard

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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File URL: http://www.sciencedirect.com/science/article/B6V8K-47CBCSN-1/2/756023977f7f997af15a3e719e62a899
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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 22 (2003)
Issue (Month): 1 (January)
Pages: 23-45

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Handle: RePEc:eee:jhecon:v:22:y:2003:i:1:p:23-45
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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  1. 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.
  2. 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.
  3. David M. Cutler & Richard J. Zeckhauser, 1997. "Adverse Selection in Health Insurance," NBER Working Papers 6107, National Bureau of Economic Research, Inc.
  4. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
  5. 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.
  6. Sarah Feldman & David Scharfstein, 1998. "Managed Care Provider Volume," NBER Working Papers 6523, National Bureau of Economic Research, Inc.
  7. 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.
  8. Ellis, Randall P, 1989. "Employee Choice of Health Insurance," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 215-23, May.
  9. 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.
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