Health Maintenance Organizations (HMOs) are repeatedly described as a general solution to the health care crisis and a specific solution to the problems confronting Medicare and Medicaid. The potential incorporation of HMOs into Medicaid has promised to improve the states' ability to accurately budget program expenditures, simplify management, eliminate abusive practices directly linked to fee-for-service (e.g., billing for undelivered services or providing unnecessary care) and, most important, contain costs. At the same time it has promised to increase access to mainstream medicine. Experience has shown, however, that the promise has often been severely compromised by unethical HMO marketing practices, inadequacy of services and excessive administrative costs. This article examines some of the reasons: the political process which created HMOs, the rhetorical claims which exaggerated the strengths of prepaid group practice and distorted the formulation of policy, and the peculiar characteristics of the Medicaid program which have caused Medicaid HMOs to deviate considerably from theoretical expectations.

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