Outsourcing Public Insurance Provision: What Do Medicaid Managed Care Organizations Do?

While the political process can determine what public goods a society demands, elected officials and bureaucrats must then decide on how to best allocate such goods in terms of efficiency and effectiveness. Commonly, governments either provide public goods directly or pay private parties to administer them on their behalf, with the latter amounting to 9% of US GDP in 2015 alone.

We study such an arrangement within the health care context, where outsourcing contracts are both prevalent and a source of significant spending. The primary US public insurer for lower-income individuals (Medicaid) often relies on outside firms to design and deliver medical benefits. It is a priori unclear if this is a proper or perverse incentive structure from the perspective of Medicaid patients. Controlling costs by skimping on care would not be in the patients’ best interests; however, more aggressive care and disease management by these firms could improve patient welfare and outperform a government administered passive payer approach.

We exploit a recent legislative decision in Florida that shifted virtually all Medicaid beneficiaries into a Medicaid managed care plan. We use a difference-in-differences design to show that Medicaid managed care organizations (MCOs) do not reduce service provision in the short-run. In fact, chronically ill patients receive more generous services and greater management of care transitions under these contracts. For example, these patients are as much as 50% more likely to have home health care following an inpatient stay. The state’s policy decision also seems to encourage greater competition among Medicaid MCOs. HHI values for Medicaid MCO market share fall by 40% after policy rollout, while the average number of MCOs offering plans in a given county nearly doubles. Our findings, in turn, suggest that there are mutually beneficial gains to this public-private trade.