Does Managed Care Hurt Health? Evidence from Medicaid Mothers

The authors thank Cairan Phibbs for generously providing data on neonatal intensive care units, and we thank seminar participants at the Abstract Most Americans are now in some form of managed care plan. These plans typically restrict access to providers and services in order to reduce costs. But it has been difficult to determine whether these restrictions affect necessary as well as unnecessary services, and whether they affect health. The primary empirical difficulty is that individuals and firms self select into managed care plans. We investigate the effect of managed care using a California policy change that required some pregnant women on Medicaid to enter managed care plans. California phased in the adoption of Medicaid managed care (MMC) creating variation in the timing that we exploit. We use a unique longitudinal data base of California births in which the effects of MMC are identified using changes in the regime faced by individual mothers between births. We find that MMC reduced the quality of prenatal care and increased low birth weight, prematurity, and neonatal death. By the mid 1990s, most Americans with health insurance were in some form of managed care (Glied, 2000). More recently, with the Medicare Modernization Act of 2003, the federal government seeks to increase the number of Medicare beneficiaries enrolled in managed care, particularly among the disabled. Other countries are considering managed care as a possible way to control costs. 1 In addition, evidence presented by Baker (1999) suggests important spillover effects from managed care to the traditional " fee-for service " (FFS) sector. Thus developing a better understanding of the impact of managed care on utilization of care, costs and health has implications beyond those subject to managed care. Unlike traditional fee-for-service (FFS) health plans that reimburse care provided by any doctor the patient wishes to see, managed care plans restrict access to providers and services. Moreover, managed care providers often face capitated fees-that is, they receive a lump sum payment per patient independent of the services they provide. This fee structure creates clear incentives to provide fewer services. Restrictions on services and on reimbursements are intended to reduce costs by discouraging the inappropriate use of care. But what happens to the quality of care and to patients' health? So far, it has been difficult to establish whether the adoption of managed care reduces the use of appropriate medical care and ultimately affects actual health outcomes. …