DO HMOS ENCOURAGE PREVENTION? AN ANALYSIS OF ALTERNATIVE HEALTH CARE PLANS

We examine consumers' choice of preventive care and providers' choice of capacity (which affects the transaction costs of consuming health care) under alternative health care financing plans. We show that consumers choose Pareto‐optimal prevention and providers choose optimal capacity under a pure feE‐for‐service (FFS) plan and under a mixed plan that includes an up‐front fee and a fee for service. Under a pure prepaid plan, however, consumers may over‐ or underconsume prevention. In the former case, capacity restrictions under such a plan (e.g., long office waits, limited options) may be interpreted as a second‐best response to overconsumption. We also find that the dollar costs of health care are higher under the prepaid plan. These conclusions cast doubt on some of the presumed advantages of HMOs.