This is the implication of a new RAND study appearing in the September/October issue of Health Affairs. It shows that total costs for employer health plans are substantially lower in areas with high HMO enrollment. Growth in premiums also seems to be lower in such markets.

News reports, including a front-page story in last Wednesday's New York Times, indicate that HMO premiums are increasing at double-digit rates, largely because of soaring drug costs. The reports raise serious questions about whether the initial cost control success achieved by managed care organizations was a flash in the pan. But would the current premium hikes be even greater in the absence of a strong HMO presence? The RAND study - the first to examine the effect of HMO market penetration on total premiums - suggests that this might well be the case.

The authors based their analysis on interview data from 1993 and 1997 surveys of well over 20,000 private employers across the country in each year. They found that the employers' health plan costs were about 10 percent lower in markets in which HMOs' market share was above 45 percent than in markets with HMO enrollments below 25 percent. The savings occurred both because HMO premiums were lower than premiums for non-HMO plans and because the competitive spillover effect of HMO expansion led to lower premiums across all plans.

"It is sometimes argued that HMOs have achieved savings only by selecting the healthiest and least expensive patients, or by obtaining price concessions from doctors and hospitals that are then simply shifted onto other insurers," the researchers add. "Our results suggest that this is not generally the case. In fact, we find that non-HMO premiums tend to fall with rising HMO market share, precisely the opposite of what one would observe if HMOs simply selected healthy patients and shifted costs to other insurers."

The study was conducted by Laurence C. Baker, now with the Stanford University School of Medicine, Joel C. Cantor, of Rutgers University's Center for State Health Policy, and Stephen H. Long and M. Susan Marquis of RAND. Both the surveys and the analysis were funded by the Robert Wood Johnson Foundation. RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis.