Competition, Price and Organizational Form: a Test of Price Convergence in the Hmo Market

In recent years, for-profit (FP) firms have replaced nonprofit (NP) organizations as the most prevalent form of health maintenance organization (HMO). In this paper, we provide empirical evidence on the pricing practices of both organizational forms. We theorize that nonprofit HMOs derive utility from conduct that increases their marginal cost above the minimum level. They exhibit this conduct in relatively uncompetitive markets, which leads them to set higher prices than FPs. In more competitive markets, the opportunity cost of this conduct increases, leading NPs to substitute towards more cost-efficient practices. This eventually leads to convergence of FP and NP prices. Our empirical analysis of non-IPA model HMOs in MSA markets supports these predictions. Our results imply that the shift towards for-profit ownership in health insurance will become less relevant as HMO markets become more competitive.