HMO coverage of cosmetic procedures: Response to market competition

Theory suggests that insurance policies should not cover purely cosmetic procedures. This paper attempts to explain empirical variation in coverage of a purely cosmetic procedure. Health maintenance organizations (HMOs) are modeled in a Cournot competition with two decisions-the number of policies and the limits placed on medical care utilization. Comparative statics for an individual market suggest, first, that restrictiveness is positively associated with the number of HMOs. Second, restrictiveness is positively associated with the predisposition to demand managed care products. Third, each effect is strengthened by increasing the other parameter. Restriction of tattoo ablation, a purely cosmetic procedure, is examined empirically. The first and second predictions are supported at low levels of predisposition and numbers of HMOs, while the third prediction is not supported. (JEL 111).