Does capitated managed care affect budget predictability? Evidence from Medicaid programs

As the second largest item in the budget of every US state, Medicaid budget stability and financial transparency have significance for every state. This study is the first to test whether managed care enrollment reduces the variance of Medicaid spending, in contrast to the focus of the existing literature on spending levels. This variance bears directly on whether budget constrained states whether budget constrained states benefit from managed care in the form of stabilized spending, leading to improved budget predictability. Capitated payments stabilize spending at the margin, but the effects may be unobservable in aggregate due to variation in enrollment, which is directly measured in the analysis, or selection bias, which is unobserved. Although the majority of Medicaid enrollees are in managed care, the study shows that managed care use has been concentrated among the enrollees with the most stable spending, resulting in only small gains to budget predictability. This finding is robust to the exclusion of the claims expenditures that exhibit the most variance.