MAKE OR BUY - HMOS CONTRACTING ARRANGEMENTS FOR MENTAL-HEALTH-CARE

Many health maintenance organizations (HMOs) are contracting with exte rnal vendors for mental health care, rather than maintaining an intern al mental health department. We develop a framework for analyzing HMOs ' contracting choices, rooted in transaction cost economics. Applying this framework, external contracting seems most likely to appeal to sm aller, newer HMOs and those located in areas with multiple vendors. Pr essure from value-oriented buyers may make it harder for HMOs to provi de mental health internally, without costly reforms to their product. HMO contracting arrangements deserve further study, given their implic ations for cost and the quality of care.