What Medicaid Managed Care Can Tell Us About Controlling Costs

By Maria Polyakova, PhD
October 9, 2020

Recent political debates have tended to focus on the question of private versus public provision of health insurance for Americans. At the core of that debate, however, are questions of cost versus quality and quantity of care. How much care improvement can be achieved at the same or lower cost? And beyond that, how much quality are we willing to sacrifice to decrease cost?

A recent NBER working paper by Michael Geruso, Tim Layton and Jacob Wallace brings new light to these questions based on a research design that we frequently hope for (and rarely get!) in economics – randomization.

The authors looked at detailed medical claims data on more than 70,000 people eligible for Medicaid in New York City who were randomly assigned to different Medicaid managed care plans. These plans are private contractors that provide Medicaid coverage for fixed per enrollee payments from the state and hence have strong incentives to keep costs low. Using the claims data, the authors measured how much plans spent per enrollee and what type of care people got. They found that not all plans are created equal — some plans managed to substantially reduce health care costs by up to 30%.

Unfortunately, it does not seem that lower-cost plans control costs by steering patients from low-value to high-value care. Instead, the paper documented across the board reductions in utilization in the lower-cost plans and a large increase in avoidable hospitalizations. The latter is an especially interesting finding, as there is little consensus in the literature on whether cost reductions tend to harm health in a measurable way or if they eliminate waste. In this case, patients seemed to realize that they were not getting great care. Even though they faced the same co-pays in all plans, patients were more likely to leave lower-cost plans.

This study provides new rigorous evidence that a low-cost plan is not guaranteed to be high value. It reminds us that insurers — both public and private — as well as policymakers and the public need to grapple with the cost and quality tradeoffs in health care.

Maria Polyakova is an assistant professor in the Center for Health Policy at Stanford University School of Medicine and a member of the 2021 Tradeoffs Research Council. She’s a health economist whose research focuses on public and private health insurance.

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