Health Care Management Science 3 (2000) 23–29 23 Data Envelopment Analysis to determine efficiencies of health maintenance organizations Kris Siddharthan a , Melissa Ahern b and Robert Rosenman c a Department of Health Policy and Management, University of South Florida, Tampa, FL 33612, USA b Department of Health Policy and Administration, Washington State University, Pullman, WA 99163, USA c Department of Economics, Washington State University, Pullman, WA 99163, USA Received 22 December 1999; revised 26 August 1999 We use Data Envelopment Analysis (DEA) to measure the relative technical efficiencies of 164 HMOs licensed to practice in the United States in 1995 with data collected from the American Association of Health Plans. Health care output measures used in the analysis are the number of commercial, Medicare and Medicaid lives covered in each plan. Inputs to the model are health care utilization measures such as the number of medical and surgical inpatient days, number of maternity and newborn stays in days, number of outpatient and emergency room visits and the number of non-invasive and invasive procedures performed on patients in an ambulatory setting. Mean efficiency of health plans was 40% (of the most efficient). We use multivariate analysis to try and explain variations in efficiency. Enrollment influences efficiency, with larger HMOs being more efficient than those with fewer enrollees. Plans with a more even distribution of Commercial, Medicare and Medicaid patients were more efficient on average than plans with heterogeneous mixes in enrollment. HMOs with Medicare patients are significantly less efficient, with efficiency decreasing with increasing Medicare participation in plan membership. Health plans in operation for longer periods of time had greater outputs with the same inputs. Health plans that had a majority of their enrollees in network or IPA type arrangements were more efficient as were for-profit plans compared to not-for-profits. Policy implications are discussed. 1. Introduction This study uses available data and linear programming to estimate a frontier efficiency model for health maintenance organizations (HMOs). This issue is important because most health reform initiatives in the United States have depended on managed care as the key form of financing and delivery of health care reform. Few studies have been conducted that estimate the level of efficiency in the HMO industry. The study uses national HMO data comprising all HMOs licensed to offer services in the United States in 1995 and therefore provides a comprehensive analysis of the variances associated with inputs and outputs in care giving. Health maintenance organizations (HMOs) account for a growing majority of new health plan enrollees. To control increases in health care premium costs, employers have included an increasing number of managed care organi- zations in health plans offered to employees. Employees find managed care organizations an attractive alternative because of relatively low out-of-pocket costs and premiums that are lower than traditional indemnity plans. HMOs that are technically efficient (either minimizing costs given a level of outputs or maximizing outputs given inputs) will have a competitive price advantage, assuming HMOs pass cost savings to customers. Additionally, in harboring eco- nomic and health resources, the efficiency of managed care organizations is an important allocative issue from the em- ployers’ and government’s viewpoint of ensuring equity in access and quality to health care. Empirical studies have documented many factors related to HMO efficiency. Ownership (hospital, physician, insur- ance company) has been shown to affect inputs and effi- ciency [1]. An HMO’s organization in care giving has also been shown to affect choice of inputs and efficiency. Model types include staff models, in which physicians are paid on a capitated or salaried basis by the HMO. In group/network models an HMO contracts with one or more independent group practices to provide care, usually on a capitated and/or discounted fee-for-service basis. Independent prac- tice arrangements (IPAs) usually pay physicians on a dis- counted fee-for-service basis. Generally, evidence shows that because model types are related to physician compensa- tion methods, model type is a predictor of services delivery and HMO efficiency [2–6]. IPA physicians are usually paid on a fee-for-services basis for hospital care providing for few incentives to not admit patients. Consequently, there are fewer incentives in an IPA setting concerning hospital services than other model types [7]. While the model types used in this survey only crudely represent physician pay- ment incentives [6], they are the only indicators available for the HMOs being studied here. Currently, for-profit HMOs account for a substantial ma- jority of HMOs and cover about half of all HMO enrollees. Several studies have argued that for-profit institutions will produce more efficient health care delivery for three rea- sons. First, providers who share in an organization’s profits pay more attention to cost [8]. Second, for-profit facilities are thought to attract more capable managers, leading to  Baltzer Science Publishers BV