Financing preventive care in HMOs: a theoretical analysis

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This paper has reviewed the problems of financing preventive care in HMOs. Removal of the enrollment uncertainty problem would eliminate a formidable deterrent to subscriber-HMO cooperation in the financing of preventive care. This cooperation is likely to be a prerequisite for optimal investment in prevention owing to the public-good nature of the benefits from prevention. The cost of enrollment uncertainty is shown diagrammatically to be derived from the distribution of enrollment and the schedule of expected present value of savings in medical expenditures resulting from prevention. The suggested solutions to the problem of uncertain enrollment involve subscriber insurance of an HMO's enrollment risk. In this analysis, the decision to invest in prevention has been modeled as an all-or-nothing decision. That is, prevention is a 'lumpy' good that must be purchased in discrete amounts. Alternatively, one might consider the optimal level of investment in prevention. The optimal level is the quantity at which the marginal benefits from prevention (accruing to both the HMO and the subscriber) are equal to the marginal cost. Enrollment uncertainty would have the effect of increasing the marginal cost, and the suggested solutions would be the same.

Original languageEnglish (US)
Pages (from-to)68-78
Number of pages11
Issue number1
StatePublished - Dec 1 1982

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