Association for Public Policy Analysis & Management

Private provision of public services has become ubiquitous in the United States healthcare system. Nowhere is this more true than in the Medicaid program, the program for providing health insurance benefits to low-income and disabled Americans and the largest payer for health care in the United states, where over 60% of beneficiaries are enrolled in a private comprehensive Medicaid Managed Care plan. Despite the clear policy significance of the privatization of public health insurance programs like Medicaid, many of its consequences remain unknown, especially for sicker and more vulnerable populations that are simultaneously more likely to benefit from the tools of managed care employed by these private plans and more likely to be harmed by efforts of private managed care plans to deter these (typically unprofitable) individuals from enrolling by limiting their access to needed care. In this paper, we study the consequences of Medicaid privatization for adults with disabilities, exploiting sharp variation in enrollment in private Medicaid managed care plans induced by the introduction of managed care mandates for SSI recipients in select counties in Texas and New York.

Using contiguous counties where private Medicaid plans were not introduced as controls, we show that privatization led to an overall increase in healthcare spending of 10% in Texas, combining a 20% decrease in inpatient spending, a 27% increase in prescription drug spending, and a 14% increase in outpatient spending. Increases in drug spending were driven by take-up of drugs used to treat chronic conditions common to this population, including mental illness, pain, asthma, heart disease, and diabetes. Decreases in inpatient spending were driven by potentially avoidable inpatient admissions related to these same diseases, suggesting improvements in health and quality of life for this population. We show the importance of features of both the public and private sides of the program for determining the effects of privatization. Specifically, we show that strict rationing of drugs in the Texas public FFS Medicaid program explains the large drug effects of privatization and that incomplete contracting explains results related to changes in use of long-term care. Finally, we test the effects of the shift to managed care on mortality, non-mortality SSI program exit, and the probability of positive earnings for the SSI population.