Can Private Insurers Deliver Medicaid More Efficiently Than the Government?

Macambira et al. (2025) examined whether privately managed Medicaid plans perform better than publicly administered fee-for-service Medicaid in controlling costs while maintaining quality and consumer satisfaction. They analyzed administrative data from nearly 100,000 Louisiana Medicaid enrollees who were randomly assigned to either private managed care or public fee-for-service coverage. They found that private managed care reduced overall healthcare spending by 5.6%, including a 25% reduction in prescription drug spending after pharmacy benefits were privatized. However, they also found evidence of lower healthcare quality in some areas, higher rates of avoidable emergency department use (14% higher), and substantially lower enrollee satisfaction, as beneficiaries were much more likely to switch away from managed care plans.

Why This Article Was Selected for The Policy Scientist

The question of whether governments should directly provide public services or contract with private organizations is one of the most consequential issues in public policy. As Medicaid now covers more than 90 million Americans and relies heavily on private managed care organizations, understanding the tradeoffs between public and private administration has implications far beyond healthcare alone. The topic is especially timely as states continue to revisit the structure of Medicaid programs and reconsider which services should remain publicly administered. This study makes an important contribution because it moves beyond the mixed findings of earlier research by using random assignment, one of the strongest causal inference approaches available, to isolate the effects of privatization. The authors have contributed extensively to the literature on Medicaid, managed care, and health insurance markets, lending additional credibility to the analysis. The administrative dataset is exceptionally strong, covering nearly 100,000 Medicaid enrollees with detailed claims and enrollment records. Although the study is based on Louisiana, the institutional features of Medicaid managed care are common across many states, making the findings relevant to other jurisdictions. The combination of random assignment, rich administrative data, and direct observation of spending and quality outcomes provides unusually persuasive evidence regarding the effects of privatizing publicly funded health insurance.

Full Citation and Link to Article

Agafiev Macambira, D., Geruso, M., Lollo, A., Ndumele, C. D., & Wallace, J. (2026). The private provision of public services: Evidence from random assignment in Medicaid. American Economic Review, 116(6), 2038–2084. https://www.aeaweb.org/articles?id=10.1257/aer.20230541

Central Research Question

This study examines one of the most important questions in the administration of public programs: does the private provision of publicly funded health insurance outperform direct government administration? Specifically, Agafiev Macambira, Geruso, Lollo, Ndumele, and Wallace investigate whether Medicaid beneficiaries experience different costs, healthcare quality, and levels of satisfaction when they are enrolled in privately administered managed care plans rather than publicly administered fee-for-service Medicaid. The authors seek to determine not only whether privatization reduces government spending, but also how any savings are achieved and whether they are accompanied by changes in access to care, healthcare utilization, or patient well-being.

The question is especially significant because Medicaid is the largest means-tested program in the United States and insures more than 90 million individuals. Over the past several decades, states have increasingly shifted Medicaid administration from government-run fee-for-service systems to private managed care organizations. Despite this trend, the empirical evidence regarding the consequences of privatization has remained mixed. The study attempts to provide a more definitive answer by exploiting a rare setting in which Medicaid beneficiaries were randomly assigned to either public or private coverage.

Previous Literature

The article builds upon several strands of research in health economics, public administration, and the economics of privatization. Earlier theoretical work, including Hart, Shleifer, and Vishny’s analysis of government contracting, emphasized the potential tradeoff between efficiency and quality when public services are outsourced. Private firms may have stronger incentives to reduce costs, but those same incentives can encourage reductions in quality that are difficult to monitor or measure.

Empirical research on Medicaid managed care has produced inconsistent findings. Some studies concluded that managed care reduces spending, while others found little effect or even higher costs. Similarly, evidence regarding quality and health outcomes has been mixed. Some researchers documented improvements or no detectable harms, while others found evidence of reduced access to care and poorer outcomes. A major limitation of much of this literature is the difficulty of establishing causality. Individuals often choose their own plans, making it difficult to distinguish the effects of the plans themselves from the characteristics of the people who enroll in them.

The authors also draw upon research examining private provision within Medicare, including studies of Medicare Advantage plans. These studies generally find spending differences between public and private coverage models, but they often rely on observational data and indirect identification strategies. The present study advances the literature by using random assignment, allowing the authors to isolate the causal effects of privatization more convincingly than most prior research.

Another contribution is the paper’s examination of mechanisms. Previous studies typically treated managed care as a “black box,” measuring spending differences without fully understanding how those differences emerged. This article opens that box by examining claims denials, prescription drug management, provider prices, and utilization controls.

Data

The study relies on administrative data obtained through a partnership with the Louisiana Department of Health. The data encompass nearly 100,000 Medicaid beneficiaries who were automatically assigned to either fee-for-service Medicaid or private managed care plans beginning in 2012. The administrative records provide detailed information on healthcare utilization, healthcare spending, enrollment decisions, claims denials, and measures of healthcare quality.

The sample includes approximately 94,976 unique enrollees and nearly 285,000 enrollee-year observations. Because the data originate from administrative records rather than surveys, measurement error is minimized. The authors observe actual healthcare transactions, including prescription drug claims, outpatient visits, inpatient care, and spending paid by Medicaid.

A particularly important feature of the dataset is its ability to track denied claims. These data allow the authors to directly observe utilization management practices that are normally difficult to study. The authors can therefore identify whether managed care plans reduce costs through lower prices, reduced utilization, substitutions among services, or other mechanisms.

The dataset also contains information necessary to construct measures of healthcare quality. These include preventive care indicators, access to primary care, prescription drug utilization, emergency department use, and other measures derived from established healthcare quality frameworks. The breadth and depth of the administrative records make this one of the most comprehensive datasets used to study Medicaid privatization.

Methods

The study’s methodological strength derives from its use of a natural experiment based on random assignment. When Louisiana implemented managed care, many Medicaid beneficiaries failed to actively choose a health plan. These individuals were automatically assigned by the state to either a private managed care plan or a publicly administered fee-for-service option. Because the assignments were effectively random, the resulting comparison approximates a randomized controlled trial.

The authors employ instrumental variables and two-stage least squares estimation to account for imperfect compliance. Although individuals could later switch plans, initial assignment strongly predicted subsequent enrollment. This approach allows the authors to estimate the causal effect of enrollment in managed care rather than merely the effect of assignment.

The researchers also conduct extensive balance tests to confirm that the treatment and control groups were comparable prior to assignment. They find little evidence of systematic differences between groups, supporting the validity of the research design.

In addition to the primary identification strategy, the authors exploit a second natural experiment involving the discontinuation of Louisiana’s fee-for-service program. This secondary analysis provides an independent test of the main findings and helps address concerns about external validity.

The combination of random assignment, rich administrative data, instrumental variables estimation, and multiple identification strategies represents one of the strongest causal research designs available in applied public policy research.

Findings/Size Effects

The central finding is that private managed care reduced healthcare spending relative to publicly administered fee-for-service Medicaid. Overall spending declined by approximately 5.6 percent, equivalent to about $82 per enrollee annually.

The largest source of savings came from prescription drugs. Following the transfer of pharmacy benefits to managed care organizations, prescription drug spending fell by approximately 25 percent. Importantly, these reductions did not result primarily from fewer prescriptions being filled. Instead, managed care plans achieved savings by encouraging substitution toward lower-cost medications and by implementing utilization management strategies that altered prescribing patterns.

Outpatient spending also declined under managed care, although the magnitude of the reduction was smaller than for prescription drugs. Inpatient spending showed little change, largely because the study population was relatively young and healthy and therefore used little inpatient care.

The effects on healthcare quality were mixed. Managed care reduced some measures of primary and preventive care utilization. Beneficiaries enrolled in managed care were less likely to receive annual primary care visits. The study also found evidence of increased emergency department utilization. Specifically, avoidable emergency department visits were approximately 14 percent higher among managed care enrollees than among beneficiaries in fee-for-service Medicaid.

The analysis of prescription drug utilization produced more nuanced findings. Although overall drug spending declined substantially, the authors found evidence that use of some high-value medications, including diabetes drugs, increased. This suggests that spending reductions were achieved largely through more efficient pharmaceutical management rather than through broad reductions in access.

Consumer satisfaction differed markedly across coverage models. Beneficiaries assigned to managed care were much more likely to switch plans than those assigned to fee-for-service Medicaid. The probability of switching increased by approximately 13.5 percentage points, representing more than a threefold increase relative to the fee-for-service group. This result suggests that beneficiaries generally preferred the public option despite the lower costs generated by managed care.

Conclusion

The study provides unusually credible evidence regarding the effects of privatizing Medicaid administration. Using random assignment and extensive administrative data, the authors show that private managed care organizations reduced spending relative to publicly administered fee-for-service Medicaid. Most of these savings originated in the management of prescription drug benefits, where managed care plans encouraged substitution toward lower-cost therapies and used utilization management tools to influence prescribing behavior.

At the same time, the findings reveal important differences between pharmacy management and medical care management. While prescription drug savings were substantial and generally not associated with reductions in medication access, the management of medical benefits produced more modest savings and was associated with lower utilization of some primary care services, higher rates of avoidable emergency department use, and lower consumer satisfaction.

The study therefore contributes to a more nuanced understanding of privatization. Rather than demonstrating a uniform effect of private administration, the evidence suggests that the consequences depend on the specific services being managed and the mechanisms available to administrators. By identifying both the magnitude and sources of spending reductions, the article significantly advances the literature on Medicaid, public service contracting, and the broader question of when private organizations can deliver publicly funded services more efficiently than government agencies.