Bryan Caplan  

HMOs Died Because They Worked

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Robin's got a great graph on the HMO revolution.  HMOs held health care spending as a fraction of GDP constant during most of the 90s.  Nothing before or since has managed to do the same.  The graph makes me wonder what happened to non-HMO costs - especially Medicare costs - during the same period.  Robin?

Update: Robin responds in the comments.

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COMMENTS (6 to date)
Robin Hanson writes:

Apparently (See Table 1), Medicare spending was held pretty low during that period as well:

Medicaid spending growth, which averaged over 27 percent per year between 1990 and 1992, slowed considerably in the years following the enactment of Public Law 102234, although DSH payments remain a significant share of total Medicaid spending.

The years that followed the cost explosion of the early 1990s saw the growth of a number of Medicaid reform efforts and experiments on the part of States. These included increased use of managed care and statewide health reform demonstrations under Section 1115 of the Social Security Act. By the end of 1996, more than 24 States, accounting for over 60 percent of Medicaid spending, had demonstration projects that were either approved or pending. This period also saw an improving economy, along with moderating price inflation Oust 2.2 percent per year) and decelerating Medicaid caseload growth (averaging 3.6 percent, or about 30 percent of the previous era). Overall, Medicaid expenditure growth averaged less than 8 percent per year.

The slowdown in spending growth, however, did not come soon enough to deter congressional proposals to convert Medicaid into a block grant program. In 1995, Congress considered establishing the "Medigrant" program, which would have ended the Federal Medicaid entitlement and capped Federal matching funds. Though this provision was not adopted, the prospect of a capped program led States to accelerate spending in FY 1995, which was to be the base year for calculating the block grants (U.S. General Accounting Office, 1997). The resulting increase in 1995 expenditures contributed to a growth rate of less than 2 percent in 1996, the lowest one-year growth rate in Medicaid's history.

fundamentalist writes:

When the media, AMA, and Congress were bashing HMO's, family health insurance was $500/mo. I told friends at the time that is they succeeded in destroying the HMO's ability to rein in costs we would soon be paying $1,000/mo for the same insurance. They thought I was crazy. That would never happen. Now the same coverage is $1,200/mo.

ed writes:

Is Robin mixing up Medicare and Medicaid? I'm confused.

Robin Hanson writes:

Ed, oops, you are right. Try instead Table 1 from here, which says Medicare spending growth was also lower in this period.

Les writes:

If HMO's held medical care costs to a constant percentage of GDP in the 1990's, why is that surprising? Were HMO's not paid a fixed annual amount per patient, which would give them a strong incentive to minimize annual cost per patient in order to maximize annual profit per patient?

Further, from a patient point of view, isn't this a perverse incentive? Minimizing annual cost per patient would tend to skimp on patient medical care - just like rationing of medical care under single payer medical care in Canada results in lengthy waiting times.

Dan writes:

@ Les

Profit maximization isn't achieved through cost cutting alone. It is also done by winning business through good service. This is the essence of competition between business models: marginal tradeoffs are decided by consumer behavior rather than by Brian Deese.

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