Abstract
Many health maintenance organizations (HMOs) are contracting with external vendors for mental health care, rather than maintaining an internal mental health department. We develop a framework for analyzing HMOs' contracting choices, rooted in transaction cost economics. Applying this framework, external contracting seems most likely to appeal to smaller, newer HMOs and those located in areas with multiple vendors. Pressure from value-oriented buyers may make it harder for HMOs to provide mental health internally, without costly reforms to their product. HMO contracting arrangements deserve further study, given their implications for cost and the quality of care.