The effect of HMOs on fee-for-service health care expenditures: evidence from Medicare.

This paper examines the relationship between HMO market share and fee-for-service health care expenditures using 1986-1990 county- and metropolitan statistical area-level data on Medicare expenditures and HMO market share. Fixed-effects estimates imply that fee-for-service expenditures are concave and decreasing in market share. Increases in market share from 20% to 30% are associated with 3-7% expenditure reductions. Instrumental variable estimates that exploit cross-sectional variation in HMO activity also indicate a concave relationship, with expenditures declining in market share for market shares above 15-18%, but imply larger expenditure responses to market share changes.