A Dose of Managed Care: Controlling Drug Spending in Medicaid
Effectively designed market mechanisms may reduce growth in health care spending. In this paper, we study the impact of privatizing the delivery of Medicaid benefits on drug prices and utilization. Exploiting granular data, we find that drug spending would fall by 22.4 percent if the drug benefit was fully administered by Medicaid Managed Care Organizations (MCOs), largely through lower point-of-sale prices and greater generic usage. The effects are driven by MCOs’ ability to design drug benefits and steer consumers toward lower cost drugs and pharmacies. By contrast, MCOs do not appear to skimp on performance by reducing overall drug consumption.