HMOs, Competition, and Government

This article considers the role of three sets of forces affecting the development of health maintenance organizations (HMOs) during the early 1970s: legal restrictions, market conditions, and the federal government's policy stance. Our review of the evidence suggests that the rapid increase in the number of HMOs during this period was primarily due to favorable market conditions in certain areas of the country combined with a highly encouraging federal policy toward HMOs. Legal restrictions do not appear to have been as serious a barrier to HMO development as was earlier believed. In 1973-74, major new legislation was enacted at both the federal and state levels, ostensibly to encourage HMO development. Our review of this legislation suggests that, while it removes many of the old legal requirements which apparently were not serious barriers to HMO development, the new legislation imposes a host of new conditions and requriements on HMO participation in the health care marketplace. Ironically, some of these new features may impede the operation of the very market forces which encouraged the earlier HMO growth.