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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.

Suggested Citation

  • Laurence C. Baker & Kenneth S. Corts, 1995. "The Effects of HMOs on Conventional Insurance Premiums: Theory and Evidence," NBER Working Papers 5356, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5356 Note: HC
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    References listed on IDEAS

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    1. Lewis Tracy R. & Sappington David E. M., 1995. "Insurance, Adverse Selection, and Cream-Skimming," Journal of Economic Theory, Elsevier, vol. 65(2), pages 327-358, April.
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    3. 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.
    4. 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 0137, National Bureau of Economic Research, Inc.
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    7. Bowden,Roger J. & Turkington,Darrell A., 1990. "Instrumental Variables," Cambridge Books, Cambridge University Press, number 9780521385824, March.
    8. Randall S. Brown & Jeanette W. Bergeron & Dolores Gurnick Clement & Jerrold W. Hill & Sheldon M. Retchin, 1993. "The Medicare Risk Program for HMOs: Final Summary Report on Findings from the Evaluation," Mathematica Policy Research Reports bcd980d40db84cfa936366a0a, Mathematica Policy Research.
    9. Marquis, M. Susan, 1992. "Adverse selection with a multiple choice among health insurance plans: A simulation analysis," Journal of Health Economics, Elsevier, vol. 11(2), pages 129-151, August.
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    16. William E. Encinosa & David E. M. Sappington, 1997. "Competition among Health Maintenance Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 129-150, March.
    17. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November.
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    Cited by:

    1. 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 46, The Ratio Institute.
    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. 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.
    4. Kosteas, Vasilios D. & Renna, Francesco, 2014. "Plan choice, health insurance cost and premium sharing," Journal of Health Economics, Elsevier, vol. 35(C), pages 179-188.
    5. Baker, Laurence C., 1997. "The effect of HMOs on fee-for-service health care expenditures: Evidence from Medicare," Journal of Health Economics, Elsevier, vol. 16(4), pages 453-481, August.
    6. Martha A. Starr & R. Forrest McCluer, 2014. "Prices and Quantities in Health Care Antitrust Damages," Working Papers 2014-03, American University, Department of Economics.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • L0 - Industrial Organization - - General

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