Health Maintenance Organizations and state DRG hospital cost control programs: the need for federal preemption

The growth of Health Maintenance Organizations (HMOs) as alternatives to the conventional health care system is the result of HMOs' financial competitiveness and their ability to provide efficient health care without wasteful and costly medical procedures. An HMO's goal is to minimize the cost of providing responsible medical care. As a result, HMOs attempt to limit the length of stay of a patient in a hospital by providing alternatives to hospital care. They achieve a competitive advantage by utilizing less expensive methods of treatment. The emergence of diagnostically related group (DRG) regulatory systems threaten the viability of HMOs by eliminating their competitive advantage. State-adopted DRG systems require hospitals to charge a fixed rate to all patients with similar diagnoses. This eliminates the advantage an HMO might gain by reducing a patient's length of stay. The Author argues that since HMOs are federally supported, they should be exempt from any DRG system implemented by a state. Further, the Author argues that while federal law ostensibly eliminates the conflict between HMOs and the DRG systems, HMOs are still restrained from free negotiations with hospitals. Accordingly, the Author contends that courts should apply federal statutes that encourage HMOs, preempt state laws, and thus allow HMOs to negotiate freely with hospitals regarding the rates of payment for patients.