HMO growth and hospital expenses and use: a simultaneous-equation approach

A principal problem with previous studies that have estimated the effects of prepaid group practices (PGPs) on hospital costs and use is the treatment of PGP growth rates as an exogenous variable. To the extent that the entry and subsequent growth of PGPs may be affected by high hospital costs and low use, the observed association between hospital costs and use and PGP market shares is confounded. To separate the effects of PGP growth on hospital expenses and use from the effects of hospital expenses and use on PGP growth, a simultaneous-equation model is estimated using data for 25 standard metropolitan statistical areas (SMSAs) from 1972 to 1982. The results indicate that PGP growth has a significant positive effect on average hospital expenses per day and per admission in an SMSA, but no statistically significant effect on average hospital expenses per capita. PGP growth also has a significant negative effect on both admission rates and average length of stay. In contrast to results from single-equation specifications, neither higher hospital expenses per day nor per admission are found to result in higher levels of PGP market shares in an SMSA and, in fact, both lower hospital expenses per capita and lower admission rates lead to significantly higher PGP market share levels.