Fee-for-Service Health Care Expenditures

Evidence of Selection Effects Among Subscribers Who Choose HMOs

by Joan L. Buchanan, Shan Cretin

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The health maintenance organization (HMO) has been promoted as a more efficient method of rendering health services than the fee-for-service (FFS) system. Theorists have pointed out, however, that competition among insurance plans may not achieve the desired ends if plans (such as HMOs) lower costs by attracting healthier clients instead of being more efficient. This report studies whether a dual choice environment fosters the segregation of high-expenditure families into HMO or FFS plans. The authors found that families selecting HMOs had lower mean expenditures than families who remained in the FFS system. These expenditures were even lower in the year immediately preceding the switch in health plans, suggesting that families may withhold use in anticipation of changing plans. The families who leave HMOs have higher mean expenditures than those who entered. Some, but not all, of these differences are explained by family characteristics.

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