Efficiency Gains Under Incomplete Contracting: Evidence from Medicaid

While government contracting is pervasive, there is limited understanding of the magnitude of resulting efficiency gains, as well as the degree to which incomplete contracting inhibits their pass-through to either governments or constituents. I examine these questions by looking to Medicaid contracting in New York, where the state pays private insurers to coordinate beneficiary care and reimburse providers, in lieu of doing so directly. These contracts exhibit incompleteness, as private insurers end up responsible for some but not all medical services, with the rest remaining under public provision. For comparing Medicaid coverage across the public and private options, I exploit involuntary beneficiary switching between the two, driven by age based enrollment restrictions at 65. I also leverage unique administrative data, which longitudinally tracks individual health utilization across the public & private Medicaid settings. I find evidence of efficiency improvements under private Medicaid, through inpatient utilization reductions, although these reductions are partly offset by outpatient care increases. Patients likewise appear to benefit from private Medicaid, through enhanced outpatient care access, at the same time that care quality remains unchanged along other observable dimensions. Governments simultaneously appear to suffer a fiscal loss, which is exacerbated by incomplete contracting, as private plans shift costs to medical services that remain under public provision. Eventual integration of these services into existing private contracts yields a 16% reduction in overall fiscal costs.