Why Do HMOs Spend Less? Patient Selection, Physician Price Sensitivity, and Prices
44 Pages Posted: 12 Aug 2015 Last revised: 18 Apr 2017
Date Written: April 17, 2017
Provider cost-control incentives have become an important part of the health insurance landscape in the United States. These incentives are strongest in capitated managed care organizations, especially HMOs, because such organizations are paid a fixed amount regardless of the spending they generate. Using a sample of insurance claims from about 500 plans, I find that in HMOs, spending on anti-cholesterol drugs is 19% lower than in other insurance plans. This spending difference could reflect the strong cost-control incentives generated by capitation, but it could also reflect the selection of healthy, price-sensitive patients into HMOs, or it could simply reflect lower prices. To understand the difference, I estimate a model of physician prescribing and patient refill decisions. Patients in HMOs are 50% more sensitive to copays than are other patients, consistent with selection of healthy patients into HMOs. Even after adjusting for this selection, however, HMO physicians remain highly price sensitive. This high price sensitivity explains about a quarter of the spending difference; combined with lower prices, it explains about 45% of the difference. Selection of healthy, low spending patients into HMOs explains the remainder. Capitated payment systems help steer patients toward low cost care, without sacrificing patient health or welfare.
JEL Classification: G22, H51, I11, I13
Suggested Citation: Suggested Citation