A paper by Mark Shepard and Jacob Wallace (2026) has a great overview of the Medicaid managed care program. The first question one may have is, how does Medicaid managed care differ from other forms of government procurement.
“In standard public procurement—such as contracting for infrastructure projects—the government specifies desired services, solicits bids, selects winners, and manages contracts, often resulting in a single contractor. In regulated insurance markets, by contrast, firms generally enter freely and compete under rules governing prices, plan design, and subsidies—as in programs like the Affordable Care Act state-level Marketplaces for individual health insurance or Medicare Advantage. Medicaid managed care combines these models: states select participating insurers via a procurement process, but then allow those insurers to compete for enrollees within a tightly regulated program.”
Why do this?
Consumer choice incentivizes good customer service (ideally) and some competition. The procurement process (ideally) would set some minimum floor of quality or financial viability.
Consumers in most states do have choices of Managed Medicaid plans, but generally relatively limited choices as shown in the figure below. Moreover, many Medicaid beneficiaries— about 45 percent in the median state— acutally do not choose a plan; rather, they get auto-assigned by the state.
Who cares?
Is Medicaid managed care actually important? The answer is yes as it has grown dramatically in recent decades. The article states:
“…from a tiny share of Medicaid enrollment in the 1980s, Medicaid managed care grew sharply during the 1990s to cover about 60 percent of Medicaid enrollees by 2000, following a broader shift towards managed care in US health insurance during the 1990s. Whereas managed care experienced a nationwide ‘backlash’ in the late 1990s, Medicaid managed care enrollment continued to…By 2024, roughly 85 percent of Medicaid beneficiaries were enrolled in some form of managed care.”
Why was there a backlash against managed care? The key issue is that while managed care incentivizes efficiency, it does not incentivize quality, particularly when quality is difficult to observe. The authors explain.
“On the one hand, under capitated insurance contracts, private managed care organizations capture the full benefits of making cost-reducing changes like eliminating unnecessary care, negotiating lower prices, and finding ways to keep people healthy. Private insurers may be better able to reduce costs and improve quality than a program operated by public sector employees…On the other hand, private insurers may go too far in cutting costs because they do not internalize the negative impacts of cost-cutting on “ non-contractible” quality…For example, an insurer could cut costs by denying claims for truly necessary services or by maintaining an inadequate network of doctors or hospitals…
Thus, the superiority of the ‘buy’ option (private contracting) depends on the extent to which quality is observable and contractible”
Why do states use Medicaid managed care if quality is so difficult to measure?
One reason is budget predictability. The risk of high costs generally gets shifted to the private insurers; the government generally just pays the managed care organizations (MCOs) a capitated rate that is risk adjusted based on enrollee demographics and comorbidities. The figure below shows evidence is mixed on whether Medicaid managed care reduces cost. Generally, Medicaid managed care does save reduce health care spending, but the impact on government spending is uncertain as Medicaid managed care adds additional costs (i.e., company profits, government contracting administrative cost and quality investigations). Second, politically, many Medicaid beneficiaries are lower income and they may not have the political clout or outside options to fight back against low quality care.
Why doesn’t price matter?
Perhaps surprisingly, cost/price plays a small role in how States select managed Mediciad plans to participate in their state program. Why is this? The winner’s curse:
“…cost-based auctions may lead to a “winner’s curse” where the winning firms are those most likely to have underestimated their costs…Minnesota’s 2015 procurement offers one such example. To reduce cost, Minnesota allowed cost to account for 45 percent of the auction score, and two new entrant insurers with low bids won most of the statewide contracts…Within months, these insurers reported large losses, and one eventually exited. Minnesota subsequently removed cost from its Medicaid procurement scoring.”
The paper has more interesting details on the Managed Medicaid program and is worth a deeper read.
