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

  • Mark Duggan

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
Date of revision:
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
Note: HC PE
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  1. Currie, Janet & Fahr, John, 2005. "Medicaid managed care: effects on children's Medicaid coverage and utilization," Journal of Public Economics, Elsevier, vol. 89(1), pages 85-108, January.
  2. Leibowitz, Arleen & Buchanan, Joan L. & Mann, Joyce, 1992. "A randomized trial to evaluate the effectiveness of a Medicaid HMO," Journal of Health Economics, Elsevier, vol. 11(3), pages 235-257, October.
  3. 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.
  4. Mark Duggan, 2000. "Hospital Ownership and Public Medical Spending," NBER Working Papers 7789, National Bureau of Economic Research, Inc.
  5. Levinson, Arik & Ullman, Frank, 1998. "Medicaid managed care and infant health," Journal of Health Economics, Elsevier, vol. 17(3), pages 351-368, June.
  6. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  7. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  8. Glied, Sherry, 2000. "Managed care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 13, pages 707-753 Elsevier.
  9. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 135-151, Fall.
  10. Andrei Shleifer, 1998. "State Versus Private Ownership," NBER Working Papers 6665, National Bureau of Economic Research, Inc.
  11. 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.
  12. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
  13. Snyder, Christopher M., 1998. "Why do larger buyers pay lower prices? Intense supplier competition," Economics Letters, Elsevier, vol. 58(2), pages 205-209, February.
  14. 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.
  15. 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.
  16. Baker, Laurence C., 1997. "The effect of HMOs on fee-for-service health care expenditures: Evidence from Medicare," Journal of Health Economics, Elsevier, vol. 16(4), pages 453-481, August.
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