ABSTRACT..The growth of health maintenance organizations (HMOs) commonly has been viewed as a “procompetitive” change in the structure of the health care delivery system. Because HMOs collect a prepaid fee from subscribers, they serve a dual role as insurers and providers of health care. While HMOs may have competed directly with conventional insurance plans, their effect in health care markets is potentially quite different. A multisector spatial equilibrium model, which incorporates the optimizing behavior of consumers, independent fee‐for‐service(FFS)providers, and a centralized HMO, is used to explore the effects of an exogenous shift in market structure away from FFS delivery toward the provision of seivices by the HMO. As more physicians are diverted from FFS practice to enter the HMO, both the HMO membership fee and prices in the FFS sector tend to rise. This pattern is consistent with empirical trends in the United States during the 1980s where, despite the rapid growth in HMOs and other forms of prepaid care, both FFS prices and HMO membership fees have risen