Price competition and hospital cost growth in the United States (1989-1994)

In recent years, most health care markets in the United States (US) have experienced rapid penetration by health maintenance organizations (HMOs) and preferred provider organizations (PPOs). During this same period, the US has also experienced slowing health care costs. Using a national database, we demonstrate that HMOs and PPOs have significantly restrained cost growth among hospitals located in competitive hospital markets, but not so in the case of hospitals located in relatively concentrated markets. In relative terms, we estimate that HMOs have contained cost growth more effectively than PPOs.