This article identifies the impact of managed-care reforms on the utilization of medical services within the military health-services system. The data come from a recent demonstration project that substituted a health maintenance organization (HMO) and preferred provider organization (PPO) for traditional fee-for-service (FFS) arrangements. Results from a semiparametric model indicate that the generosity of benefits in the HMO increased demand for ambulatory services. Unlike the private-sector experience with managed care, aggressive utilization review did not significantly curtail inpatient stays. These results vitiate the presumed effectiveness of reform strategies that rely on large, geographically diffused managed-care networks to contain public-sector health costs.
Originally published in: RAND Journal of Economics, v. 26, no. 2, Summer 1995, pp. 277-295.
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