Does Competition Improve Health Care Quality?

To identify the effect of competition on health maintenance organizations' (HMOs) quality measures. Longitudinal analysis of a 5-year panel of the Healthcare Effectiveness Data and Information Set (HEDIS) and Consumer Assessment of Health Plans Survey (R) (CAHPS) data (calendar years 1998-2002). All plans submitting data to the National Committee for Quality Assurance (NCQA) were included regardless of their decision to allow NCQA to disclose their results publicly. NCQA, Interstudy, the Area Resource File, and the Bureau of Labor Statistics. Fixed-effects models were estimated that relate HMO competition to HMO quality controlling for an unmeasured, time-invariant plan, and market traits. Results are compared with estimates from models reliant on cross-sectional variation. Estimates suggest that plan quality does not improve with increased levels of HMO competition (as measured by either the Herfindahl index or the number of HMOs). Similarly, increased HMO penetration is generally not associated with improved quality. Cross-sectional models tend to suggest an inverse relationship between competition and quality. The strategies that promote competition among HMOs in the current market setting may not lead to improved HMO quality. It is possible that price competition dominates, with purchasers and consumers preferring lower premiums at the expense of improved quality, as measured by HEDIS and CAHPS. It is also possible that the fragmentation associated with competition hinders quality improvement.