Minimum optimum scale of federally qualified health maintenance organizations.

From a policy standpoint it is important to identify the level of output at which average cost per unit is at its lowest. If minimum optimum scale is achieved at a very high output level, it would suggest that monopoly conditions should be allowed to prevail. If, however, minimum optimum scale is achieved at a low level of output, more organizations would be able to survive, allowing for competition in the marketplace. Using data published by the Office of Health Maintenance Organizations, the relationship between size and average cost was examined in federally qualified staff, group, and Independent Practice Association (IPA) health maintenance organizations (HMOs) and minimum optimum scale was identified for each organization. The findings support the hypothesis that least cost size is achieved at the lowest level of output in IPA HMOs. The hypothesis that minimum optimum scale would be achieved at a lower level of output in group rather than in staff HMOs was not supported. This may be due to the practice of some staff HMOs of employing part-time, salaried providers and purchasing unique services from other providers.