Association for Public Policy Analysis & Management

Medicaid, the largest public health insurance program in the US, has transitioned from a fee-for-service system (FFS) primarily administered by the government to a managed care system (MMC) administered by private insurers over the last few decades. I examine how hospitals' responses to financial incentives under these two systems affect hospital costs and newborn health outcomes. I analyze the universe of inpatient discharge records across New York State from 1995-2013, totaling 4.5 million births. First, I exploit an arbitrary determinant of MMC enrollment: infants weighing less than 1,200 grams were excluded from MMC and were instead served through FFS. Using a regression discontinuity design, I find that newborns enrolled in MMC stayed fewer days in hospitals and thus had less expensive visits relative to newborns enrolled in FFS. The cost difference is driven by birth hospitals retaining more newborns enrolled in FFS while transferring away those enrolled in MMC. I find that MMC had limited impacts on newborn health, measured by in-hospital mortality and hospital readmission. Hospitals tended to transfer out MMC newborns only when a high-quality hospital was nearby, which resulted in these infants receiving uncompromised care. Second, I exploit county-level rollout of the MMC mandate to examine impacts on the full population of infants using a difference-in-difference design. I find that hospitals achieved a similar rate of cost savings as for infants over the 1,200-gram threshold, while length of stay, the probability of transfer, and mortality did not change following the mandate. This finding suggests that there are alternative, successful methods by which hospitals reduce costs under MMC, including for high-risk deliveries.