THE IMPACT OF HMO COMPETITION ON PRIVATE HEALTH-INSURANCE PREMIUMS, 1985-1992

A critical unresolved health policy question is whether competition st imulated by managed care organizations can slow the rate of growth in health care expenditures. We analyzed the competitive effects of healt h maintenance organizations (HMOs) on the growth in fee-for-service in demnity insurance premiums over the period 1985-1992 using premium dat a on 95 groups that had policies with a single, large, private insuran ce carrier. We used multiple regressions to estimate the effect of HMO market penetration on insurance premium growth rates. HMO penetration had a statistically significant (p < .015) negative effect on the rat e of growth in indemnify insurance premiums. For an average group loca ted in a market whose HMO penetration rate increased by 25% (e.g., fro m 10% to 12.5%), the real rate of growth in premiums would be approxim ately 5.9% instead of 7.0%. Our findings indicate that competitive str ategies, relying on managed care, have significant potential to reduce health insurance premium growth rates, thereby resulting in substanti al cost savings over time.