Has the shift to managed care reduced Medicaid expenditures? Evidence from state and local-level mandates

From 1991 to 2009, the fraction of Medicaid recipients enrolled in HMOs and other forms of Medicaid managed care (MMC) increased from 11 percent to 71 percent. This increase was largely driven by state and local mandates that required most Medicaid recipients to enroll in an MMC plan. Theoretically, it is ambiguous whether the shift from fee-for-service into managed care would lead to an increase or a reduction in Medicaid spending. This paper investigates this effect using a data set on state- and local-level MMC mandates and detailed data from the Centers for Medicare and Medicaid Services (CMS) on state Medicaid expenditures. The findings suggest that shifting Medicaid recipients from fee-for-service into MMC did not on average reduce Medicaid spending. If anything, our results suggest that the shift to MMC increased Medicaid spending and that this effect was especially present for risk-based HMOs. However, the effects of the shift to MMC on Medicaid spending varied significantly across states as a function of the generosity of the state's baseline Medicaid provider reimbursement rates.