Does Managed Care Increase Medicaid Budget Predictability?

Medicaid is the largest budget item for states, providing health insurance coverage for up to one-third of each state's residents. Mid-year adjustments to accommodate unexpected spending are costly and inefficient, leading many states to view managed care as a means of improving Medicaid efficiency through capitated payments. However, the extent to which Medicaid overages are due to per capita spending, versus enrollment fluctuations, is unclear. This study estimates the effect of Medicaid managed care on budget predictability and finds significant reductions to the magnitude of Medicaid deficits observed. Specifically, a 10 percent increase in capitated managed care reduces the average Medicaid deficits by 1 percent among states with managed care across all funding sources. For funding sources drawn from physicians and donations, the effect is three-times as large. These estimates are conservative because other forms of Medicaid cost containment, such as physician payment freezes and reductions in eligibility, are unobserved and likely bias the results downward. These findings extend the current literature on the effect of managed care on savings by establishing that managed care does stabilize the second-largest budget item for state policymakers. This improved stabilization provides reasoning behind that increased trend toward managed care enrollment without clear empirical evidence of savings.