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A Dose of Managed Care: Controlling Drug Spending in Medicaid

Author

Listed:
  • David Dranove
  • Christopher Ody
  • Amanda Starc

Abstract

We study the effect of privatizing Medicaid drug benefits on drug prices and utilization. Drug spending would decrease by 21.3 percent if private insurers administered all drug benefits. One-third of the decrease is driven by private insurers' ability to negotiate prices with pharmacies. The remaining two-thirds is driven by the greater use of lower cost drugs, such as generics, and is only realized in states that give private insurers the flexibility to design drug benefits. Privatization does not reduce prescriptions per enrollee and spending cuts are smaller for drugs that lower medical spending.

Suggested Citation

  • David Dranove & Christopher Ody & Amanda Starc, 2021. "A Dose of Managed Care: Controlling Drug Spending in Medicaid," American Economic Journal: Applied Economics, American Economic Association, vol. 13(1), pages 170-197, January.
    • Handle: RePEc:aea:aejapp:v:13:y:2021:i:1:p:170-97
    DOI: 10.1257/app.20190165
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    Cited by:

    1. Kamyar Nasseh & John R. Bowblis, 2022. "The effect on dental care utilization from transitioning pediatric Medicaid beneficiaries to managed care," Health Economics, John Wiley & Sons, Ltd., vol. 31(6), pages 1103-1128, June.
    2. Nicholas Bagley & Benjamin Berger & Amitabh Chandra & Craig Garthwaite & Ariel D. Stern, 2018. "The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century," NBER Chapters, in: Innovation Policy and the Economy, Volume 19, pages 97-137, National Bureau of Economic Research, Inc.
    3. Lee, Ajin & Vabson, Boris, 2024. "The value of improving insurance quality: Evidence from long-run Medicaid attrition," Journal of Health Economics, Elsevier, vol. 94(C).
    4. Abe Dunn & Joshua D Gottlieb & Adam Hale Shapiro & Daniel J Sonnenstuhl & Pietro Tebaldi, 2024. "A Denial a Day Keeps the Doctor Away," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(1), pages 187-233.
    5. Layton, Timothy J. & Politzer, Eran, 2025. "The dynamic fiscal costs of outsourcing health insurance - evidence from Medicaid," Journal of Public Economics, Elsevier, vol. 247(C).
    6. Timothy J. Layton & Nicole Maestas & Daniel Prinz & Boris Vabson, 2019. "Private vs. Public Provision of Social Insurance: Evidence from Medicaid," NBER Working Papers 26042, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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