This paper investigates the influence of market forces and state regulations on enrollment in prepaid group practices (PGPs)—the dominant form of HMO. Using data at the metropolitan-area level, the paper estimates a lagged-adjustment model in two stages. The first stage estimates the determinants of the existence of a PGP of viable size. Using a technique appropriate for censored samples, the second stage estimates the determinants of enrollment given viability. The result of greatest relevance for policymakers is that restrictions on corporate employment of physicians hinder the growth of PGPs.

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