The health maintenance organization (HMO) is an alternative to the traditional fee‐for‐service health care system in the United States. Other studies have shown that the HMO reduces hospital utilization and offers greater benefit packages than fee‐for‐service. This paper tests whether the presence of HMO's provides effective competitive pressure on Blue Cross, the largest insurer of hospital costs. The cross sectional regression analysis supports the hypotheses that Blue Cross has reduced hospital utilization and increased benefit packages in response to HMO competition. Consequently, competitive forces are shown to be operative in at least one area of heal