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Markets, Governments, and HMO Development in the 1990s

This article examines the impact of population demographics, health market characteristics, and government purchasing and regulation on the development of the HMO industry in the 1990s. I focus on two facets of development—HMO market share and the number of HMOs in operation inmetropolitan areas. My central findings are threefold: Population size is a critical determinantof development. Health market characteristics such as hospital expenditures and physician supply affect development, but often in ways that differ from previous periods (e.g., development is greater in areas with relatively large numbers of specialists). Both government purchasing and regulation affect development, but in ways that may be contradictory in motivation and outcome (e.g., state officials seek to contain costs through Medicaid and Medicare managed care and to enhance consumer protection and satisfaction through regulations such as coverage requirements). These results imply that in a period in which development is increasingly occurring in areas that may have unfavorable markets, policy makers (unlike in earlier eras) influence HMO supply and demand, through their roles both as purchasers and as regulators of managed care.

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