Substantial cost differences arise because HMOs have a lower incidence of diseases among their generally healthier members, and pay lower prices for the same medical treatments.
HMO insurance premiums generally are far lower than the costs of traditional indemnity coverage. Critics of HMOs have long suspected that this is because the HMOs restrict access to expensive or essential medical treatments. But a new NBER Working Paper indicates that HMOs do not save money in that way.
In Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans (NBER Working Paper No. 7832), authors Daniel Altman, David Cutler, and Richard Zeckhauser examine why managed care plans are less expensive than traditional indemnity plans. They find that the substantial cost differences arise because HMOs have a lower incidence of diseases among their generally healthier members, and pay lower prices for the same medical treatments, but not that HMO members receive fewer expensive treatments.
The authors use data on 200,000 Massachusetts state and local employees and family members who are insured in a single pool and must choose between an indemnity plan and a variety of HMOs. The average HMO costs within this group are 40 percent lower than those of the indemnity plan, and premiums for the indemnity policy are 77 percent higher than premiums for the most expensive HMO.
The authors analyze the sources of cost difference across plans in the treatment of eight common medical conditions, which represent over 10 percent of total U.S. health care costs: heart attacks; cancers (breast, cervical, colon, prostate); diabetes (type I and II); and live births. To explain cost differences, the authors consider the importance of patient mix, treatment intensity, and prices paid.
This study reveals that roughly half of the HMO cost savings are attributable to the lower incidence of these conditions in the HMOs. The authors note that other studies have uniformly shown that HMOs enroll younger, healthier members than indemnity plans, which explains the lower incidence of diseases in the HMO plans. Virtually all of the remaining savings, 45 percent of the total, come because HMOs pay lower prices for the same treatments.
Surprisingly, the authors find that differences in treatment intensity -- that is, the procedures selected to treat a particular condition -- explain only a small part of the cost differences. The indemnity plan offers more intense treatment for live births only (more Caesarean sections), while the HMOs offer more intense treatment for heart attacks and colon cancer. The similarity of treatment patterns in HMOs and indemnity insurance suggests that quality differences between the these two types of plans are not large.
-- Lucille Maistros