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  5. The Private Provision of Public Services: Evidence from Random Assignment in Medicaid

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Private Provision of Public Services: Evidence from Random Assignment in Medicaid

  • Danil Agafiev Macambira
  • Michael Geruso
  • Anthony Lollo
  • Chima D. Ndumele
  • Jacob Wallace
American Economic Review (Forthcoming)

Abstract

This paper examines the effects of privatizing social health insurance. We exploit a natural experiment in Medicaid, wherein nearly 100,000 enrollees were randomly assigned between a publicly-operated fee-for-service system and private managed care. Managed care reduced costs by 5.6% via cost-effective substitutions within prescription drugs and via lower prices for outpatient services. We present evidence that pharmacy utilization management was the key mechanism reducing overuse and encouraging substitution to lower-cost drugs without decreasing quality. In contrast, privatizing medical benefits led to only modest savings and was associated with decreased healthcare quality and consumer satisfaction.

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