NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Laurence C. Baker, Kenneth S. Corts

NBER Working Paper No. 5356
Issued in November 1995
NBER Program(s):   HC

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.

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Document Object Identifier (DOI): 10.3386/w5356

Published: American Economic Review, Paper and Proceedings, Vol. 86, no. 2, 1996, pp. 389-94

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