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

55 Pages Posted: 22 Jun 2000 Last revised: 20 Feb 2022

See all articles by Laurence C. Baker

Laurence C. Baker

Stanford University; National Bureau of Economic Research (NBER)

Kenneth S. Corts

University of Toronto - Rotman School of Management

Date Written: November 1995

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

Baker, Laurence C. and Corts, Kenneth S., The Effects of Hmos on Conventional Insurance Premiums: Theory and Evidence (November 1995). NBER Working Paper No. w5356, Available at SSRN: https://ssrn.com/abstract=225419

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Kenneth S. Corts

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