A Dose of Managed Care: Controlling Drug Spending in Medicaid

Effectively designed market mechanisms may reduce growth in health care spending. In this paper, we study the impact of privatizing the delivery of Medicaid drug benefits on drug spending. Exploiting granular data that allow us to examine drug utilization, we find that drug spending would fall by 22.4 percent if the drug benefit was fully administered by Medicaid Managed Care Organizations (MCOs), largely through lower point-of-sale prices and greater generic usage. The effects are driven by MCOs' ability to design drug benefits and steer consumers toward lower cost drugs and pharmacies. MCOs do not appear to skimp on performance, either by reducing overall drug consumption as measured by prescriptions per enrollee or reducing utilization of drugs that offset other medical spending.