Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans

43 Pages Posted: 8 Aug 2000 Last revised: 29 Nov 2022

See all articles by Daniel Altman

Daniel Altman

Economist Newspaper Ltd.; National Bureau of Economic Research (NBER)

David M. Cutler

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: August 2000

Abstract

We examine why managed care plans are less expensive than traditional indemnity insurance plans. Our database consists of the insurance experiences of over 200,000 state and local employees in Massachusetts and their families, who are insured in a single pool. Within this group, average HMO costs are 40 percent below those of the indemnity plan. We evaluate cost differences for 8 conditions representing over 10 percent of total health expenditures. They are: heart attacks, cancers (breast, cervical, colon, prostate), diabetes (type I and II), and live births. For each condition, we identify the portions of the cost differential arising from differences in treatment intensity, enrollee mix, and prices paid for the same treatment. Surprisingly, treatment intensity differs hardly at all between the HMOs and the indemnity plan. That is, relative to their fee-for-service competitor, HMOs do not curb the use of expensive treatments. Across the 8 conditions, roughly half of the HMO cost savings is due to the lower incidence of the diseases in the HMOs. Virtually all of the remaining savings come because HMOs pay lower prices for the same treatment.

Suggested Citation

Altman, Daniel and Cutler, David M. and Zeckhauser, Richard J., Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans (August 2000). NBER Working Paper No. w7832, Available at SSRN: https://ssrn.com/abstract=238478

Daniel Altman (Contact Author)

Economist Newspaper Ltd. ( email )

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David M. Cutler

Harvard University - Department of Economics ( email )

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Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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