Selective contracting in California: early effects and policy implications

California is the first state to enable its Medicaid program and private insurance firms to negotiate with providers for prices to be paid for health services. Initial findings from a two-year study sponsored by the National Governors' Association indicate few problems with Medicaid contracting. Hospital contracts are widely dispersed at prices highly favorable to the state, there has been little documented dislocation of patients or physicians into a two-tier system, and there is no evidence of reduction in quality of care. State savings are estimated at $165 million for the first year of the program. Selective contracting in the private sector, by contrast, has moved more slowly than anticipated, owing to a number of unforeseen barriers.