HMO penetration and physicians' earnings

OBJECTIVES. The goal of this study is to estimate whether cross-sectional variations in enrollment in health maintenance organizations (HMOs) affected physicians' earnings and hourly income in 1990. METHODS. Using data from a nationally representative sample of 4,577 younger physicians (<45 years) conducted in 1991, we estimated a partial reduced-form model of physicians annual income and per hour income. We tested whether HMO penetration is endogenous and used the instrumental variables approach to obtain unbiased estimates. RESULTS. HMO penetration had a negative and statistically significant impact on physicians earnings in 1990. A doubling of the average level of HMO penetration in the market is estimated to reduce annual earnings by 7% to 10.7%, and hourly earnings by approximately 6% to 9%. CONCLUSIONS. It appears that HMOs were successful in reducing physicians' annual and per hour earnings in 1990, presumably through a combination of fewer visits and lower payment rates for people covered by HMOs. Although these results cannot be generalized to all physicians, the experience of a younger cohort of physicians may still be a good indicator of the future effects of HMOs because younger physicians may be more susceptible to market forces than older and more established physicians. Moreover, these results may be somewhat conservative because they reflect market behavior in 1990, several years before the rapid growth and more aggressive market behavior of HMOs in recent years.