New Report: Reining in Medicaid Managed Care

How states use private insurers to obtain billions in additional federal Medicaid funds.

NEW YORK, NY — When states began contracting with private insurers to administer Medicaid on a large scale in the 1990s, proponents argued that this shift would reduce costs and improve the quality of care. Yet three decades later a new report by Manhattan Institute senior fellow Chris Pope finds that this policy change has failed to deliver on those promises and instead largely serves to impede accountability by allowing states to side-step restrictions on the use of federal funds.

Seventy-seven percent of Americans enrolled in Medicaid receive coverage through Managed Care Organizations (MCO), which are private insurers that states pay a fixed monthly fee per beneficiary. MCOs are not subject to conventional limits on fees that states can get from the federal government for specific Medicaid services. Distributing funds through private insurers makes expenditures much harder to track – and enables states to obtain federal Medicaid funding for purposes beyond the intended objectives of the program. 

Key findings include: 

• Despite decades of expansion, a 2018 Congressional Budget Office report found that there is no consistent evidence that managed care reduces Medicaid spending or improves outcomes.
• A 2021 federal investigation found that only eight out of thirty-nine managed care states provided complete and accurate data on the medical service utilization on which payments to providers were based. 
• State-directed payments (which require MCOs to pay medical providers at inflated rates) increased from two states in 2016 to thirty-nine states and a projected $124 billion in 2025, with some hospitals receiving as much as six times what Medicare would pay for the same service. 

This report challenges the long-held assumption that managed care reduces costs, and argues that Congress must reform the policy by closing funding loopholes, standardizing contract terms, and requiring spending transparency. 

Click here to read the full report.