The Effects of Managed Care Organizations on Government Spending and Health Care Quality: Evidence from California’s Medicaid Mandates

Grant Description: How does mandatory Medicaid managed care affect cost and outcomes?  Researchers evaluated how county-level mandates that require most Medicaid recipients to enroll in a managed care plans affect spending and health outcomes in California.  Specifically, they estimated the effect of switching recipients from fee-for-service (FFS) to managed care in twenty counties on government spending, medical care treatments, and health outcomes.  Preliminary work done by the researchers showed that the switch from FFS Medicaid to Medicaid managed care among people eligible through welfare was associated with a significant increase in Medicaid spending and a decrease in avoidable hospitalizations.  In this study, the researchers built on that work to examine differences across the three types of managed care used, estimated the effect for eligibility categories other than welfare, assessed differences in the results based on age, race, gender, ethnicity, and urban/rural location.  The objective of the study was to provide policymakers with more information about the effects of transitioning from FFS Medicaid to Medicaid managed care in terms of spending and quality.

Policy Summary: From 1991 to 2000 the fraction of Medicaid recipients in the U.S. enrolled in a managed care plan increased from 11 percent to more than 55 percent. In many states, the main motivation for the shift was a desire to reduce both the level and growth of Medicaid spending, with the conventional wisdom suggesting that state governments would save money by contracting with HMOs and other managed care organizations. Despite the common acceptance of this view, there was surprisingly little empirical evidence to support it. Some studies had been done that looked at individual plans for a short time but few investigated this issue for an entire state over a long time period. The researcher therefore set out in this project to investigate the effect of shifting Medicaid recipients into managed care plans by focusing on California, the nation’s most populous state. During the 1990s, approximately 20 counties in this state required welfare recipients and certain other Medicaid beneficiaries to enroll in a managed care plan. These county mandates were the driving force between the more than fivefold increase in managed care penetration there, and by 2000 more than half of all Medicaid recipients in California and were enrolled in a managed care plan. The researcher purchased and processed Medicaid claims and eligibility data for a random 20 percent sample of program participants for the 1993 to 1999 period. The advantage of this data is that the researcher can accurately calculate spending for each individual by month, quarter, half-year, or year and is therefore able to explore whether spending for the same person increased or declined following their shift from fee-for-service to managed care. The final analysis for the expenditure analyses consisted of 1.2 million welfare recipients who were eligible for Medicaid at some point during the seven-year study period. The findings indicate that Medicaid spending increased by an average of 17 percent following the shift from fee-for-service to managed care, thus undermining the view that HMO contracting saved the state of California (and the federal government given the federal-state financing of Medicaid) money. This finding is especially important given that California, like many other states and like the federal government with Medicare, is considering an expansion of Medicaid managed care. The short- and long-term effects of the shift to managed care appear to be similar—thus the results are not driven by a one-time increase in funds resulting from a reorganization of Medicaid. Interestingly, counties that contracted with just one HMO witnessed a significantly larger increase in spending (25 percent) than did those counties that contracted with two or more plans (10 percent). The researcher then estimated the effect of Medicaid managed care on health care quality. He first investigated whether the shift from fee-for-service to managed care was associated with a significant change in infant health outcomes. The findings suggest that Medicaid managed care had little effect on this important set of outcome variables. He also explored whether Medicaid managed care affected the avoidable hospitalization rate. The findings demonstrated that Medicaid managed care was associated with a significant decline in avoidable hospitalizations but that a similar decline was observed for unavoidable conditions as well. This suggests that managed care organizations hospitalized fewer patients with a given condition but did not improve health. Taken together, the findings suggest that California’s shift of millions of Medicaid recipients into managed care plans increased government spending but did not improve health care quality.