Competitive behavior in the HMO marketplace

Are health maintenance organizations (HMOs) less profitable in more competitive markets, and does competition erode unusually high profits over time? To answer these questions, we examined profit rates (as a proportion of revenues) in 1994 and 1997 for all HMOs in 259 metropolitan areas. We found that profits were significantly lower on average in 1994 in markets with more competition, measured alternatively by the number of HMOs or their market concentration. We also found that there was no relationship between a market's relative profit ranking in 1994 and its ranking in 1997; highly profitable markets were not able to preserve their relative standing. Neither the proportion of HMO enrollees in for-profit HMOs nor HMO market penetration was significantly related to profit rates.