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Managed Care/Market Forces

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Hospitals often form alliances with physicians when the number of HMOs in an area increases

A new study casts doubt on the commonly held view that managed care penetration (proportion of the population enrolled in health maintenance organizations, HMOs) drives strategic alliances between hospitals and their physicians. The study concludes that the number of HMOs in an area is a more important determinant of physician-hospital integration than HMO penetration.

One explanation is that a greater number of HMOs in an area fosters increased competition and prompts the HMOs to develop contracting relationships. By forming such relationships, the HMOs can differentiate among themselves and provide members with access to the hospitals they want to use. On the other hand, hospital-physician alliances may simply be the result of supply and demand. The greater the number of HMOs in a market, the greater the number of firms that a hospital can contract with and thus the greater the likelihood of obtaining a managed care contract.

To increase their chances of receiving such contracts, hospitals and their physician partners develop alliances to gain patients and market share. For instance, these researchers found that alliances were most likely to appear in markets in the upper two quartiles of HMO numbers (when the HMO count in a market exceeds four).

Alliances were least prevalent in markets with high HMO penetration but fewer HMOs. In such cases, individual HMOs may enjoy such power and control over provider reimbursement arrangements that alliances offer no negotiating advantage to area hospitals and physicians. Providers also may perceive that any efforts to develop integrated systems will be perceived by the dominant HMOs as potential competition, and thus they are dissuaded from forming alliances.

These findings are based on a study of all short-term general hospitals in urban U.S. markets (316 metropolitan statistical areas) from 1993 to 1995. With support from the Agency for Healthcare Research and Quality (HS09237), Lawton R. Burns, Ph.D., M.B.A., and colleagues pooled data from the InterStudy HMO Census and the annual survey conducted by the American Hospital Association from 1993 through 1995 to examine the effects of HMO penetration and HMO numbers in a market on the formation of hospital-physician alliances.

See "Impact of HMO market structure on physician-hospital strategic alliances," by Dr. Burns, Gloria J. Bazzoli, Ph.D., Linda Dynan, Ph.D., and Douglas R. Wholey, Ph.D., in the April 2000 Health Services Research 35(1), pp. 101-132.

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