Efficiency Gains From Medicaid Privatization: Identifying the Magnitude and Incidence

Over the past decade, Medicare and Medicaid programs have contracted out an increasing share of their caseloads to private managed care plans, with over 25% of Medicare enrollees and over 60% of those in Medicaid currently covered through private provision (Gold 2012, KFF 2012). Privatization of Medicaid and Medicare services has been undertaken in attempt at cost savings and quality improvements. Some work have been conducted on the cost impact of privatizing Medicaid and Medicare coverage, while relatively little has been done on privatization’s impact on treatment quality, or on its net impact on social welfare. By combining a robust identification strategy with a unique set of longitudinal Medicaid claims data, we can gauge the overall welfare effects associated with privatizing Medicaid provision. To do so, we can examine the impact of involuntary managed care enrollment, for New York and Texas Medicaid recipients, on treatment composition, intensity of care, and health outcomes, along with the price levels paid to providers. We can also determine the incidence of the observed welfare changes, in terms of how efficiency gains/losses from privatization of Medicaid provision are shared among governments, insurers, patients, as well as providers. Moreover, we can examine whether the magnitude of efficiency gain from Medicaid privatization is heterogeneous across Medicaid eligibility groups, geographic settings, as well as plan types and market structures. This can motivate additional research on ways to enhance efficiency in private Medicaid managed care, as well as on existing efficiency differences between traditional Medicaid and private Medicaid managed care. Furthermore, by identifying the share of efficiency gains captured by private managed care firms, our research can identify the extent of possible gains from improved contracting between governments and insurers. Finally, while our analysis focuses explicitly on Medicaid, our study is very much generalizable to Medicare and the medical coverage of the elderly. To this end, over 25% of recipients in Medicare are currently enrolled in private managed care plans. Furthermore, part of our analysis focuses on the impact of Medicaid privatization on high risk, disabled, as well as near-elderly Medicaid enrollees, all of whom have similar characteristics to Medicare recipients.