Managed Care and the Growth of Medical Expenditures

We use data across states to examine the relation between HMO enrollment and medical spending. We find that increased managed care enrollment significantly reduces hospital cost growth. Although increased spending on physicians offsets some of this effect, we generally find a significant reduction in total spending as well. In analyzing the sources of hospital cost reductions, we find preliminary evidence that managed care has reduced the diffusion of medical technologies. States with high managed care enrollment were technology leaders in the early 1980s; by the early 1990s those states were only average in their acquisition of new technologies. This finding suggests managed care may significantly affect the long-run growth of medical spending.