Did California’s Medicaid HMO contracts save the state money?

Throughout its history, Medicaid provided health insurance for the nation’s poor. It did this by reimbursing providers on a fee-for-service basis. In the 1990s, however, California and other states decided to let private insurance companies bid for the right to provide services for Medicaid patients. These HMOs would receive a fixed per patient per month payment and the private insurer would be responsible for providing health care to Medicaid enrollees.

HMOs may be more efficient than the government since 1) they have an incentive to keep enrollees healthy to save cost, 2) they can negotiate lower input prices, and 3) competition may lead to higher quality, lower priced medical care. On the other hand, keeping the government run fee-for-service program may have been more efficient if 1) the government’s size and negotiating power could decrease input costs, 2) there may be increasing returns to scale, 3) the HMOs may include significant markups in their bids, and 4) HMOs may offer medical services which do not appeal to unhealthy enrollees (i.e., adverse selection).

A paper by Mark Duggan in the Journal of Public Economics in 2004 aims to see if contracting out Medicaid health care provision to private HMOs decreased costs. Duggan uses the fact that California enacted a mandate that all AFDC Medicaid enrollees must switch to a private HMO. For other individuals, such as those on SSI and those who were disabled, deaf or blind, the switch to the HMO was voluntary. This mandate was enacted between January 1993 and December 1999 depending on the county. The author uses variation in the county enactment date to find the effect of Medicaid HMOs on cost.

Background

The manner in which California instituted the transitioned individuals into private managed care plans can be categorized into 3 groupings:

1. Geographic Managed Care. “the state government contracts with several commercial HMOs to coordinate care for Medicaid recipients. Plans initially applied by submitting a menu of prices at which they would be willing to insure each type of Medicaid recipient. The government then awarded contracts to the plans most likely to deliver high quality medical care at a low price, though the weight placed on quality and spending was not specified.”
2. County Organized Health System (COHS). “Under this model, the not-for-profit, community-based HMO was reimbursed a fixed amount per recipient-month that varied by eligibility category.” Individuals did not have any plan choice and the state did not allow bids from for-profit firms.
3. “Two plan” counties. In these counties, the Medicaid enrollees would be able to choose between one private, commercial plan and one not-for profit plan. “…the state solicited bids from private companies and awarded a contract to just one of the plans.”

The following chart gives the type and date of managed care mandate by county.

Methods

Duggan uses the following equations to estimate spending.

• ManCare_jkt = α₁ + γ₁Mandate_kt + μ₁X_jkt + θ_1j + λ_1t + t*ρ_1k + ε_1jkt
• Spending_jkt = α₂ + γ₂Mandate_kt + μ₂X_jkt + θ_2j + λ_2t + t*ρ_2k + ε_2jkt

Subscripts j, k, and t index individuals, counties, and years respectively. The variable Mandate is equal to the fraction of individual j‘s Medicaid eligible months in which a mandate was in effect. ManCare is equal to the fraction of the j‘s eligible months in which he is actually enrolled in an HMO. Spending is equal to the Medicaid spending for person j at time t.

Results

Duggan finds that the managed care mandate increased Medicaid spending. Medicaid spending increased by between 17% and 23% for counties in which the mandate came into effect. These results, however, were less pronounced where there was competitive bidding between insurance companies (i.e., the Geographic Managed Care and “Two plan” counties).

Also, despite the increased spending, the author finds no evidence of increased quality in terms of better infant birth outcomes.

• Duggan, Mark (2004) “Does contracting out increase the efficiency of government programs? Evidence from Medicaid HMOs” Journal of Public Economics, v 88(12): 2549-2572/