For the efficiency model, the results indicate that higher HMO penetration in a market does not cause pressure for hospitals to become more efficient. It may be that HMO actions to manage health service utilization, especially costly hospital care, did not lead to reduction in inputs used by Virginia hospitals as has occurred in other states.
Virginia hospital markets tend to be highly concentrated (e.g., average HHI of .92 as noted in Table 3), and thus these hospitals may have been able to thwart HMO efforts to constrain payment growth. In addition, the results indicate that greater Medicaid dependence may not have motivated hospitals to be more efficient during the study period. Although federal reductions in Medicaid payment generosity might raise uncertainty, these cutbacks were smaller in magnitude for Medicaid relative to Medicare (Congressional Budget Office, 1997). Also, Virginia state policy might have mitigated the effect of changes in federal policy because Virginia expanded Medicaid coverage for its vulnerable population through its SCHIP program in 1998.