Prices and Productivity in Managed Care Insurance

Integrating the health services and insurance industries (HMOs) could lower expenditure by reducing either the quantity of services or unit price. We compare the treatment of heart attacks and newly diagnosed chest pain in HMOs and traditional plans in two data sets. The nature of these health problems should minimize selection, and OLS and instrumental-variable estimates yield consistent results. HMOs have 30 to 40 percent lower expenditures than traditional indemnity plans. Actual treatments and health outcomes differ little; virtually all the difference in spending comes from lower unit prices. Managed care may yield substantial productivity improvements relative to traditional insurance.