Health Maintenance Organizations Can Help Control Health Care Costs

PAD-80-17: Published: May 6, 1980. Publicly Released: May 6, 1980.

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Advanced economic analysis was used to study the performance of health maintenance organizations (HMO) qualified to receive Federal assistance under the Health Maintenance Organization Act of 1973. The study was made to determine if these HMO's are performing efficiently in the provision of health care services. Proponents of HMO's contend that they can provide care more efficiently and control overall health care costs by altering the basic incentive structure affecting providers.

Qualified HMO's were taking into consideration the relative costs of providing services when deciding whether to use the services of medical staffs, ambulatory health centers, and hospitals. Because the costs of these services are not affected by third party payments, HMO's should be able to allocate these resources efficiently and help control health care costs. If the HMO's analyzed continue to grow, the per unit cost of providing care will fall and maximum efficiency will be achieved. Beyond this point, further cost reductions will be unlikely without the discovery and use of new productivity-increasing technology. Also, with increased time in operation, the HMO's are experiencing increases in the real cost of providing care. This could lead to some deterioration in the financial positions of HMO's which continue to incur deficits and do not increase enrollments. GAO believes that a study organized by the Department of Health, Education, and Welfare (HEW) to determine the direction of its HMO research and evaluation activities should include the following topics: (1) a comparison of the performance of different types of HMO's; (2) a comparison of the performance of HMO's to that of the traditional system; (3) a more accurate determination of the minimum efficient size for HMO's; and (4) an analysis of the effect of HMO's on the public's health.

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