Are all Managed Care Plans Created Equal? Evidence from Random Plan Assignment in New York Medicaid Managed Care

Over the last 20 years, public health insurance in the United States has been transitioning from fee-for-service programs managed by the government to managed care programs contracted out to private insurers. This is true for Medicare where currently almost one-third of beneficiaries are enrolled in a managed care plan and for Medicaid where today over 70% of beneficiaries are enrolled in managed care. This dramatic shift has resulted in a great deal of interest in the effects of managed care on health outcomes and spending. However, despite significant heterogeneity in contract design across managed care plans, most prior research has treated managed care plans as uniform, considering only differences between “managed care” and the alternative public fee-for-service program.

In this paper, we show how managed care plans competing in the same market can differ dramatically in terms of management, utilization, and negotiations with providers. Typically, estimates of plan effects would be confounded by the sorting of consumers across health plans on the basis of health risk or moral hazard. Here, we circumvent this classic problem by exploiting random assignment of Medicaid beneficiaries to Medicaid Managed Care plans in New York. We observe plan assignments and the universe of claims for the roughly 105,000 Medicaid enrollees who are randomly assigned over our time period.

We provide evidence of substantial heterogeneity across managed care plans in spending. The detailed claims data, which include the negotiated prices paid to doctors and hospitals, also allow us to decompose the spending differences into price and quantity effects. We find that an important predictor of total spending and negotiated prices is whether the managed care plan operates only in the Medicaid market or simultaneously competes in other markets in the same region, such as Medicare Advantage. Our findings are important for understanding how managed care can limit cost growth. Our findings also shed new light on the upstream negotiations between insurers and providers.