Economies of scale and scope as an explanation of merger and output diversification activities in the health maintenance organization industry

Abstract

This paper tests for the existence and magnitude of economies of scale and scope as possible explanations for the recent observed trends in increasing health maintenance organization (HMO) scale (through merger and acquisition) and scope (through greater participation in public enrollee markets) using firm level data from a sample of California HMOs for the time period 1986-1992. The results suggest that economies of scale provide a strong justification for mergers only in the case of relatively small HMOs (i.e. those with fewer than 115,000 enrollees), and economies of scope do not explain the increasing HMO enrollment of public enrollees.