Approximately 50% of the annual increase in hospital costs comes from increased resource use per hospital admission. Health maintenance organizations (HMOs), given their fixed financial resources for patient care, have an incentive to constrain their enrollees' use of hospital resources. Our analysis investigates differences in length of stay, total charges, and the ancillary to total charge ratio for hospitalized patients in network HMOs, independent practice associations (IPAs), and fee-for-service (FFS) health plans in the Twin Cities from 1982 to 1984. Network HMO patients in several diagnostic categories are found to use significantly fewer resources, once hospitalized, than patients in either IPA or FFS plans. This difference may give network HMOs a competitive advantage in the market for health plans.

The Healthcare Educational and Research Foundation (HERF) in Minneapolis undertook a two-year research project to study the effects of health maintenance organizations (HMOs) and competition on the hospital industry in Minneapolis/St. Paul. This article summarizes HERF's major findings surrounding three key questions: (1) do the HMOs in Minneapolis/St. Paul use fewer hospital resources relative to conventional payers?; (2) do recent overall community trends in inpatient use suggest evidence of hospital utilization-reducing effects attributable to HMOs?; and (3) given the highly visible competitive process among Minneapolis/St. Paul providers, do hospital cost and revenue data suggest any evidence of cost-containment? The findings (based on data through 1982) indicate that for comparable patients, Twin Cities HMOs appear to use fewer medical care resources per hospitalized patient. There was, however, no clear evidence of community-wide, utilization-reducing effects directly attributable to the "competitive effect" of HMO introduction and development in the market. In addition, there was no empirical evidence that HMOs (which had enrolled 25 percent of the consumer market by 1982), or other large buyers of inpatient services, have selected hospitals on the basis of price as hypothesized by competition advocates.

In this paper we examine the relationship between inpatient length of stay and the patient's type of health insurance. The data consist of discharges in seven diagnosis-related groups (DRGs) from community hospitals in Minneapolis and St. Paul during 1982. After controlling for the effects of the patient's age, sex, medical condition, and severity of illness, as well as the hospital's size, teaching and ownership status, and average annual occupancy rate, we must reject the null hypothesis that the patient's type of health plan is unrelated to inpatient length of stay in Twin Cities community hospitals. We find that, in most cases, patients in prepaid group practices and independent practice associations exhibit significantly shorter lengths of stay than similar patients in Blue Cross and commercial health insurance plans, while Medicare and Medicaid patients exhibit significantly longer lengths of stay than those of similar commercially insured patients

Cost-shifting, the practice by hospitals of raising their prices to make up for reimbursement shortfalls from payers that do not pay full charges, is an important and controversial issue. Concerns about cost-shifting, particularly its effects on payment equity and cost escalation, have led many insurers, business groups, and legislators to advocate rate-setting regulation for hospitals. This article seeks to clarify the definition of cost-shifting, and quantifies its magnitude in Minneapolis/St. Paul. We believe that cost-shifting is the consequential result of the failure of both public and private payers to structure payment policies that reward cost-effective hospitals, and we outline a market-oriented alternative to rate-setting to address the discount dilemma caused by cost-shifting.