No Free Lunch: Higher spending health plans have better patients satisfaction and health

That is the finding from a paper by Geruso, Layton and Wallace (2023). They exploit the random assignment of approximately 70,000 Medicaid beneficiaries to Medicaid managed care (MMC) plans from 2008 to 2012 in New York City. In short, beneficiaries in New York who did not actively choose a plan within a designated choice period were randomly assigned to one (i.e., randomized auto-enrollment).

Exploiting the random assignment of Medicaid beneficiaries to managed care plans, we find substantial plan-specific spending effects despite plans having identical cost sharing. Enrollment in the lowest-spending plan reduces spending by at least 25 percent— primarily through quantity reductions—relative to enrollment in the highest-spending plan. Rather than reducing “wasteful” spending, lower-spending plans broadly reduce medical service provision— including the provision of low-cost, high-value care—and worsen beneficiary satisfaction and health. Consumer demand follows spending: a 10 percent increase in plan-specific spending is associated with a 40 percent increase in market share. These facts have implications for the government’s contracting problem and program cost growth

While one might hope that cost saving could come from lower prices or from prioritizing high-value services, it turns out that overall reduction in quantity leads to cost savings. Further, lower cost plans not only have lower patient satisfaction but health outcomes. Note that health outcomes were measured crudely–based on frequency of preventive care screenings, avoidable hospitalizations for 4 diseases (diabetes, COPD, heart failure or asthma, re-admission rate and emergency department use rate.

For Medicaid beneficiaries who did choose a plan, plan choice was not well correlated with publicly reported quality ratings.