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Does Contracting Out Increase the Efficiency of Government Programs? Evidence from Medicaid HMOs

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  • Mark Duggan

Abstract

State governments contract with health maintenance organizations (HMOs) to coordinate medical care for nearly 20 million Medicaid recipients. Identifying the causal effect of HMO enrollment on government spending and health care quality is difficult if, as is often the case, recipients have the option to enroll in a plan. To estimate the average effect of HMO enrollment, this paper exploits county-level mandates introduced during the last several years in the state of California that required most Medicaid recipients to enroll in a managed care plan. The empirical results demonstrate that the resulting switch from fee-for-service to managed care was associated with a substantial increase in government spending but no observable improvement in health outcomes, thus apparently reducing the efficiency of this large government program. The findings cast doubt on the hypothesis that HMO contracting has reduced the strain on government budgets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9091.

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Date of creation: Aug 2002
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Publication status: published as Duggan, Mark. "Does Contracting Out Increase The Efficiency Of Government Programs? Evidence From Medicaid HMOs," Journal of Public Economics, 2004, v88(12,Dec), 2549-2572.
Handle: RePEc:nbr:nberwo:9091

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  1. Andrei Shleifer, 1998. "State Versus Private Ownership," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1841, Harvard - Institute of Economic Research.
  2. Duggan, Mark, 2004. "Does contracting out increase the efficiency of government programs? Evidence from Medicaid HMOs," Journal of Public Economics, Elsevier, Elsevier, vol. 88(12), pages 2549-2572, December.
  3. Leibowitz, Arleen & Buchanan, Joan L. & Mann, Joyce, 1992. "A randomized trial to evaluate the effectiveness of a Medicaid HMO," Journal of Health Economics, Elsevier, Elsevier, vol. 11(3), pages 235-257, October.
  4. Mark G. Duggan, 2000. "Hospital Ownership And Public Medical Spending," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(4), pages 1343-1373, November.
  5. David M. Cutler & Mark McClellan & Joseph P. Newhouse, 2000. "How Does Managed Care Do It?," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 526-548, Autumn.
  6. Baker, Laurence C., 1997. "The effect of HMOs on fee-for-service health care expenditures: Evidence from Medicare," Journal of Health Economics, Elsevier, Elsevier, vol. 16(4), pages 453-481, August.
  7. Snyder, Christopher M., 1998. "Why do larger buyers pay lower prices? Intense supplier competition," Economics Letters, Elsevier, Elsevier, vol. 58(2), pages 205-209, February.
  8. Leemore Dafny & Jonathan Gruber, 2000. "Does Public Insurance Improve the Efficiency of Medical Care? Medicaid Expansions and Child Hospitalizations," NBER Working Papers 7555, National Bureau of Economic Research, Inc.
  9. Robert Kaestner & Lisa Dubay & Genevieve Kenney, 2002. "Medicaid Managed Care and Infant Health: A National Evaluation," NBER Working Papers 8936, National Bureau of Economic Research, Inc.
  10. Currie, Janet & Fahr, John, 2005. "Medicaid managed care: effects on children's Medicaid coverage and utilization," Journal of Public Economics, Elsevier, Elsevier, vol. 89(1), pages 85-108, January.
  11. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(3), pages 1236-1263, September.
  12. Levinson, Arik & Ullman, Frank, 1998. "Medicaid managed care and infant health," Journal of Health Economics, Elsevier, Elsevier, vol. 17(3), pages 351-368, June.
  13. Glied, Sherry, 2000. "Managed care," Handbook of Health Economics, Elsevier, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 13, pages 707-753 Elsevier.
  14. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
  15. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 135-151, Fall.
  16. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(3), pages 375-410, July.
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Cited by:
  1. Mark Duggan, 2002. "Does Contracting Out Increase the Efficiency of Government Programs? Evidence from Medicaid HMOs," NBER Working Papers 9091, National Bureau of Economic Research, Inc.
  2. Bennmarker, Helge & Grönqvist, Erik & Öckert, Björn, 2012. "Effects of contracting out employment services: Evidence from a randomized experiment," Working Paper Series, Uppsala University, Department of Economics 2012:19, Uppsala University, Department of Economics.
  3. Marianne P. Bitler & Madeline Zavodny, 2014. "Medicaid: A Review of the Literature," NBER Working Papers 20169, National Bureau of Economic Research, Inc.
  4. Marton, James & Yelowitz, Aaron & Talbert, Jeffery C., 2014. "A tale of two cities? The heterogeneous impact of medicaid managed care," Journal of Health Economics, Elsevier, Elsevier, vol. 36(C), pages 47-68.
  5. Duggan Mark G & Evans William N, 2008. "Estimating the Impact of Medical Innovation: A Case Study of HIV Antiretroviral Treatments," Forum for Health Economics & Policy, De Gruyter, De Gruyter, vol. 11(2), pages 1-39, January.
  6. Mark Stabile & Sarah Thomson, 2014. "The Changing Role of Government in Financing Health Care: An International Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 52(2), pages 480-518, June.
  7. Ilyana Kuziemko & Katherine Meckel & Maya Rossin-Slater, 2013. "Do Insurers Risk-Select Against Each Other? Evidence from Medicaid and Implications for Health Reform," NBER Working Papers 19198, National Bureau of Economic Research, Inc.
  8. Evans, William N. & Garthwaite, Craig & Wei, Heng, 2008. "The impact of early discharge laws on the health of newborns," Journal of Health Economics, Elsevier, Elsevier, vol. 27(4), pages 843-870, July.
  9. Laun, Lisa & Thoursie, Peter Skogman, 2014. "Does privatisation of vocational rehabilitation improve labour market opportunities? Evidence from a field experiment in Sweden," Journal of Health Economics, Elsevier, Elsevier, vol. 34(C), pages 59-72.
  10. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, American Economic Association, vol. 100(4), pages 1399-1431, September.
  11. Duggan, Mark, 2005. "Do new prescription drugs pay for themselves?: The case of second-generation antipsychotics," Journal of Health Economics, Elsevier, Elsevier, vol. 24(1), pages 1-31, January.
  12. Christopher C. Afendulis & Michael E. Chernew & Daniel P. Kessler, 2013. "The Effect of Medicare Advantage on Hospital Admissions and Mortality," NBER Working Papers 19101, National Bureau of Economic Research, Inc.
  13. Marton, James & Yelowitz, Aaron, 2014. "Health Insurance Generosity and Conditional Coverage: Evidence from Medicaid Managed Care in Kentucky," MPRA Paper 57412, University Library of Munich, Germany.
  14. Melissa Boyle, 2009. "Health and Utilization Effects of Increased Access to Publicly Provided Health Care: Evidence from the U.S. Department of Veterans Affairs," Working Papers, College of the Holy Cross, Department of Economics 0902, College of the Holy Cross, Department of Economics.
  15. Mark G. Duggan, 2003. "Does Medicaid Pay Too Much for Prescription Drugs? A Case Study of Atypical Anti-Psychotics," NBER Working Papers 9626, National Bureau of Economic Research, Inc.
  16. Leemore Dafny, 2008. "Are Health Insurance Markets Competitive?," NBER Working Papers 14572, National Bureau of Economic Research, Inc.

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