The impact of HMO penetration on the rate of hospital cost inflation, 1985-1993

This paper provides evidence that growth in health maintenance organization (HMO) enrollment slows hospital cost inflation. During the period 1985-1993, hospitals in areas with high rates of HMO penetration and growth had a slower rate of growth in expenses (8.3%) than hospitals in low penetration areas (11.2%). From 1992-1993, HMO growth lowered the rate of hospital cost inflation by .34 to 3.40 percentage points, depending on the base-year level and the annual change in HMO penetration. Declines in Medicare Prospective Payment System (PPS) margins also lowered hospital cost inflation; over the time period, annual hospital cost inflation was reduced by .38 percentage points. The estimates imply that the cumulative effect of liMO growth on hospital costs has been a $56.2 billion reduction (in 1993 dollars).