In response to dramatic rises in health care costs, policymakers have been debating the relative merits of regulatory and competitive strategies as a means of containing costs. One major activity espoused by proponents of competition is the growth of health maintenance organizations (HMOs) which, in their opinion, will result in the market better determining efficient levels of utilization and costs. Extending this argument, the larger the percent of the population in a market area who enroll in HMOs, the greater the market-forcing effect of HMOs in reducing overall hospital expenditures; that is, if HMOs are providing lower-cost care, then the fee-for-service system will be forced to reduce costs in order to be competitive. The authors studied the 25 largest SMSAs from 1971-1981, and controlling for environmental conditions in each market, they examined the impact of both HMO growth and regulatory activity on costs and utilization. They conclude that neither competition nor regulation had a significant impact in reducing overall hospital costs. While there may have been some impact in specific communities, no generalizable effect could be observed. However, the authors did find that increases in costs and utilization were essentially driven by supply factors such as the number of hospital beds or medical specialists in a given community.

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