HMO Mergers Cut Premiums in Only Most Competitive Markets

To understand the effect of health maintenance organizations (HMOs) on both competition and consumers, researchers at the University of Minnesota School of Public Health, Minneapolis, examined data on more than 500 HMOs operating in the United States from 1986 through 1993, focusing on the 90 mergers for which data were available.

A number of national health care reform proposals have prominently featured HMOs in part because of their effectiveness in controlling costs and their acceptance by consumers.

Throughout the 1980s, HMO enrollment increased, reaching 34 million by 1990. At the same time, there was a marketplace consolidation among HMOs.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).

Key Findings

  • Smaller and younger HMOs were more likely to merge and exit the market, or fail, while older, larger and more profitable HMOs were more likely to merge and survive.

  • Merger activity was highest among two- to four-year-old HMOs.

  • An effect on premiums was found only in the most competitive markets.

  • Some financially weak HMOs might have failed and left the market if they had not merged into stronger plans.

  • Mature HMOs are more difficult to merge because each organization has a distinctive corporate culture. Efficiency gains decreased as HMO size increased.