Effects of selective contracting on hospital efficiency, costs and accessibility

This paper exploits a natural experiment in the state of California, to show that pro-competitive healthcare policy may have unintended long-term liabilities unless the system as a whole is carefully designed to preserve access to care for the poor. California's Medicaid Reform Act of 1982 increased competition among hospitals in urban areas, with legislation which allowed direction of patients to more efficient providers via selective contracting. This slowed the average rate of hospital cost inflation, and saved the state billions of dollars. The substantial short-term savings have been documented in empirical research, but little attention has been paid to the longer-term effects of the reforms. We find that Medicaid contracts were awarded to more efficient hospitals. The distributional effects post-reform resulted in efficiency gains for most hospitals, but costs escalated for over half of the public hospitals in the sample, as their uncompensated care burdens rose. Public hospitals continued to fail during the period, leaving over half of California's counties without a county hospital by 1990. Because public hospitals provide the vast majority of healthcare for the poor in California, there is reason for concern about erosion of their access to care as an unintended outcome of pro-competitive reforms.