How Do Managed Care Plans Reduce Healthcare Costs?∗

The US public health insurance market is shifting toward reimbursement models that transfer risk away from the government and toward health insurers and healthcare providers. Instead of paying fee-for-service (FFS) to healthcare providers, Medicaid and Medicare now outsource healthcare delivery to managed care plans and the plans accept risk related to their enrollees’ healthcare costs. Previous research reaches mixed conclusions about whether managed care plans actually reduce costs. In this paper, I study Florida’s 2006 Medicaid Reform, which mandated that Medicaid beneficiaries switch from the state’s FFS system to (1) insurer-owned plans, (2) hospital-owned plans, or (3) physician-owned plans. I find that insurer-owned plans reduced costs by 7-12% in all reform markets, but insurers in different markets reduced costs in different ways. Insurers reduced the number of hospital visits after a hospital plan entered one market, but insurers reduced the average cost per hospital visit after physician plans entered another market. Motivated by these empirical findings, I show how insurers choose their strategies in different markets. The results suggest that insurers have leverage in how they reduce costs, but that competition with provider plans may restrict their options. ∗I would like to thank Doug Almond, Janet Currie, Tal Gross, Kate Ho, Bentley MacLeod, and the applied microeconomics colloquium at Columbia University for their comments and suggestions. This project was supported by grant number R36HS023504 from the Agency for Healthcare Research and Quality. The content is solely the responsibility of the author and does not necessarily represent the official views of the Agency for Healthcare Research and Quality. †Economics Department, Columbia University, 420 West 118th Street MC 3308, New York, NY 10027 [email protected].