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

Moral hazard is one of the defining challenges in health insurance markets, because consumers necessarily face less than the full marginal costs of healthcare consumed. In this paper, we study how managed care health plans use (non-price) supply-side mechanisms to address consumer moral hazard and constrain healthcare spending. We examine this issue in the context of Medicaid Managed Care in New York City, in which some beneficiaries are randomly auto-assigned across ten private plans competing in the geographic market. We exploit random assignment to identify plan effects on spending that are purged of selection. Our findings reveal significant variation in spending driven by supply-side mechanisms that differ across plans: Spending on identical beneficiaries varies by as much as 30% between the highest- and lowest-spending plan. These differences are even larger for enrollees with higher baseline spending. We show that differences in negotiated upstream prices explain only a small fraction of this difference, and that plan characteristics significantly affect the quantity and kinds of healthcare consumption by enrollees. Our findings are important for the continued reform of healthcare, in which managed care is often touted as the single most important tool for constraining healthcare spending growth.