IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/5356.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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: EH
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w5356.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Newhouse, Joseph P., 1984. "Cream skimming, asymmetric information, and a competitive insurance market," Journal of Health Economics, Elsevier, vol. 3(1), pages 97-100, April.
    2. 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.
    3. repec:mpr:mprres:1182 is not listed on IDEAS
    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.
    5. Noether, Monica, 1988. "Competition among hospitals," Journal of Health Economics, Elsevier, vol. 7(3), pages 259-284, September.
    6. 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.
    7. 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.
    8. 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, vol. 14(2), pages 149-169, June.
    9. Roger D. Feldman & Bryan E. Dowd, 1982. "Simulation of a Health Insurance Market with Adverse Selection," Operations Research, INFORMS, vol. 30(6), pages 1027-1042, December.
    10. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November.
    11. 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.
    12. Feldman, Roger & Dowd, Bryan, 1991. "Must adverse selection cause premium spirals?," Journal of Health Economics, Elsevier, vol. 10(3), pages 349-357, October.
    13. Bowden,Roger J. & Turkington,Darrell A., 1990. "Instrumental Variables," Cambridge Books, Cambridge University Press, number 9780521385824, November.
    14. repec:mpr:mprres:1250 is not listed on IDEAS
    15. David Cutler, 1994. "Market Failure in Small Group Health Insurance," NBER Working Papers 4879, National Bureau of Economic Research, Inc.
    16. Jerrold Hill & Randall Brown & Dexter Chu & Jeanette Bergeron, 1992. "The Impact of the Medicare Risk Program on the Use of Services and Costs to Medicare," Mathematica Policy Research Reports c3a2029be3384733aa2c4901e, Mathematica Policy Research.
    17. Jane Griffin, 1995. "Health Information and the Consumer," Monograph 000412, Office of Health Economics.
    18. Charles E. Phelps, 1992. "Diffusion of Information in Medical Care," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 23-42, Summer.
    19. Pauly, Mark V., 1984. "Is cream-skimming a problem for the competitive medical market?," Journal of Health Economics, Elsevier, vol. 3(1), pages 87-95, April.
    20. 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.
    21. Feldman, Roger & Dowd, Bryan, 1986. "Is there a competitive market for hospital services?," Journal of Health Economics, Elsevier, vol. 5(3), pages 277-292, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eliasson, Gunnar & Eliasson, Åsa, 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. Allen C. Goodman & Miron Stano, 2000. "Hmos and Health Externalities: A Local Public Good Perspective," Public Finance Review, , vol. 28(3), pages 247-269, May.
    3. 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.
    4. Lobanov, Mikhail (Лобанов, Михаил) & Zvezdvanovic-Lobanova, Jelena (Звезданович-Лобанова, Елена), 2017. "Specifics of Agricultural Policy in the Countries of Central-Eastern and South-Eastern Europe in 1990–2010s [Особенности Аграрной Политики В Странах Центрально- И Юго-Восточной Европы В 1990-2010-Х," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 3, pages 150-173, June.
    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. 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.
    7. 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.
    8. Martha A. Starr & Forrest R. McCluer, 2014. "Prices and Quantities in Health Care Antitrust Damages," Working Papers 2014-03, American University, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. 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.
    3. Neudeck, Werner & Podczeck, Konrad, 1996. "Adverse selection and regulation in health insurance markets," Journal of Health Economics, Elsevier, vol. 15(4), pages 387-408, August.
    4. Currie, Janet & Fahr, John, 2005. "Medicaid managed care: effects on children's Medicaid coverage and utilization," Journal of Public Economics, Elsevier, vol. 89(1), pages 85-108, January.
    5. K. P. M. Winssen & R. C. Kleef & W. P. M. M. Ven, 2017. "A voluntary deductible in health insurance: the more years you opt for it, the lower your premium?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 18(2), pages 209-226, March.
    6. K. P. M. Winssen & R. C. Kleef & W. P. M. M. Ven, 2018. "Can premium differentiation counteract adverse selection in the Dutch supplementary health insurance? A simulation study," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(5), pages 757-768, June.
    7. Sukumar Vellakkal, 2010. "Adverse Selection and Private Health Insurance Coverage in India A Rational Behaviour Model of Insurance Agents under Asymmetric Information," Working Papers id:2690, eSocialSciences.
    8. Laurence C. Baker & Ciaran S. Phibbs, 2000. "Managed Care, Technology Adoption, and Health Care: The Adoption of Neonatal Intensive Care," NBER Working Papers 7883, National Bureau of Economic Research, Inc.
    9. 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, vol. 14(2), pages 149-169, June.
    10. Sukumar Vellakkal, 2009. "Adverse Selection and Private Health Insurance Coverage in India - A Rational Behaviour Model of Insurance Agents under Asymmetric Information," Microeconomics Working Papers 22270, East Asian Bureau of Economic Research.
    11. 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.
    12. Glazer, Jacob & McGuire, Thomas G., 2011. "Gold and Silver health plans: Accommodating demand heterogeneity in managed competition," Journal of Health Economics, Elsevier, vol. 30(5), pages 1011-1019.
    13. van de Ven, Wynand P. M. M. & van Vliet, Rene C. J. A. & Schut, Frederik T. & van Barneveld, Erik M., 2000. "Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?," Journal of Health Economics, Elsevier, vol. 19(3), pages 311-339, May.
    14. 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.
    15. Daniëlle Duijmelinck & Wynand Ven, 2014. "Choice of insurer for basic health insurance restricted by supplementary insurance," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(7), pages 737-746, September.
    16. Bakker, F. M. & van Vliet, R. C. J. A., 1995. "The introduction of deductibles for prescription drugs in a national health insurance: compulsory or voluntary?," Health Policy, Elsevier, vol. 31(1), pages 53-65, January.
    17. Terza, Joseph V. & Tsai, Wei-Der, 2006. "Censored Probit Estimation with Correlation near the Boundary: A Useful Reparameteriztion," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 2(1), pages 1-12.
    18. Thomas G. McGuire & Jacob Glazer, 2000. "Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care," American Economic Review, American Economic Association, vol. 90(4), pages 1055-1071, September.
    19. Brian Nolan, 1994. "Affordability versus Quality, Effectiveness and Equity in Health Care: Is there a Trade-Off?," Papers WP055, Economic and Social Research Institute (ESRI).
    20. Patricia H. Born & E. Tice Sirmans, 2020. "Restrictive Rating and Adverse Selection in Health Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(4), pages 919-933, December.

    More about this item

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5356. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.