The Private Provision of Public Services: Evidence from Random Assignment in Medicaid
This paper examines the effects of privatizing social health insurance in the United States. We study this question in the context of the Medicaid program, the largest health insurer in the US and the largest means-tested program in the nation — serving over 90 million low-income families and individuals with disabilities. Exploiting a natural experiment wherein nearly 100,000 Medicaid enrollees were randomly assigned between a state-administered fee-for-service system and private managed care, we find that spending was nearly 10% lower for enrollees assigned to managed care plans. These savings were concentrated in prescription drugs, where we show that prior authorization was the key mechanism plans used to reduce overuse and encourage substitution to lower-cost alternatives without reducing quality. This was distinct from the effects of privatization on medical benefits, where private plans lowered quality and abraded consumers without achieving savings. In contrast to what our findings imply for an efficient public-private division of services, Medicaid has historically favored the public provision of prescription drugs and private outsourcing of medical care.
We thank Zarek Brot-Goldberg, Amitabh Chandra, Jeff Clemens, Zack Cooper, Leemore Dafny, Craig Garthwaite, Dan Kessler, Paul Goldsmith-Pinkham, Aaron Schwartz, Julia Smith, and Becky Staiger, as well as seminar participants at ASHEcon 2022, Boston University, Brown University, Duke Kunshan University, the Empirical Health Law Conference, the University of Pennsylvania Center for Health Incentives and Behavioral Economics, Stanford, the Hoover Institution Campbell Fellows Conference, and Yale University. Geruso gratefully acknowledges support by grant P2CHD042849, Population Research Center, awarded to the Population Research Center at The University of Texas at Austin by the Eunice Kennedy Shriver National Institute of Child Health and Human Development. The conclusions and opinions presented in here are those of the authors and do not necessarily reflect those of the Louisiana Department of Health or any funder. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Anthony Lollo is currently affiliated with CVS Caremark, a large pharmacy benefits manager in the United States. All of his contributions and work related to the project were completed while at Yale.Jacob Wallace
My spouse is the Senior Director of Medicaid Policy and Financing at Aurrera Health Group, an organization that works on issues related to state Medicaid policy.