Summary

Federal grants and loans are adequate to help develop new health maintenance organizations (HMO) and expand existing ones. Viable, well-managed HMO should need no more than $4 million to cover operating losses and should be able to achieve financial independence within 5 years after becoming qualified.

In order to minimize the government's risk on loans to HMO, the Department of Health, Education, Welfare (HEW) needs to develop a strategy to assess the financial soundness of an HMO. The key to financial success by an HMO is its ability to charge competitive rates which generate sufficient revenues per member to cover the costs of operation and provide sufficient additional funds. As of April 1979, HEW had not issued formal policies for administering the HMO loan program.