The Dynamic Fiscal Costs of Outsourcing Health Insurance - Evidence from Medicaid

Setting payment rates for providers contracted over multiple periods is a persistent challenge in government procurement. We study the dynamics of fiscal costs following the outsourcing of Medicaid provision to private health insurers by states. We focus on beneficiaries with disabilities who account for a third of Medicaid's spending. Using a national administrative database, we identify county-level private plan enrollment mandates and exploit them as an instrument for individuals' transition to managed care plans. These transitions, while initially slightly reducing fiscal costs, lead to a continuous increase in Medicaid's costs over subsequent years. Counties subject to mandates experience a 9.8% higher cost four years post-mandate compared to those without mandates. "Actuarially sound" endogenous payment rates, that are based on past costs in the market, may serve as mechanism underlying the rising spending.