Effect of privatized managed care on public insurance spending and generosity: Evidence from Medicaid

States choose to provide Medicaid coverage via managed care or traditional fee‐for‐service. Managed care provided by private insurers poses higher contracting costs and information asymmetry than traditional fee‐for‐service but potentially improves efficiency and reduces spending. Evaluating the effect of managed care on Medicaid spending is challenging because adoption of managed care is nonrandom and may be driven by local economic shocks that simultaneously affect Medicaid spending. This study implements a dynamic panel framework to estimate the effect of managed care enrollment on spending levels and program design. Results show reductions in Medicaid spending larger than previously found in cross‐state studies: A 10% increase of managed care enrollment reduces state Medicaid spending by 2.94%, or approximately $55 million. The study identifies which areas of spending are differentially affected by managed care enrollment and whether savings from managed care affect Medicaid design, specifically coverage generosity.