While spending on carved-out services, such as prescription drugs, is higher under private than under public Medicaid, this isn’t necessarily indicative of cost shifting by plans. For instance, such carved-out services may coincide with relatively e¢ cient forms of care; as such, private Medicaid plans (or managed care plans generally) may use more of these services, even if incurring the complete cost. To decompose the e¤ects of incomplete contracting from those of private/managed care, I focus on prescription drug services, which accounted for the plurality of all carved-out ser- vices spending. I …rst examine the e¤ect of private Medicaid (relative to public) on the use of these services, while these were excluded from private Medicaid contracts; the result of this analysis captures the combined e¤ects of managed care and incom- plete contracting. In addition, I consider how utilization of these services changes in
October 2011, when they were bundled into existing contracts (and plans were made …nancially responsible for them); here, only the e¤ect of incomplete contracting would be captured, separate from that of managed care.
E¤ ect of Incomplete Contracting: Under Switch Between Public & Pri- vate Medicaid
When examining the impact of private Medicaid enrollment on prescription drug utilization, I instrument for private Medicaid status using enrollment mandates (my secondary identi…cation strategy, involving involuntary shifts from public to private Medicaid). The results, which can be found in the top panel of Table 10, indicate that individual-level switching from public to private Medicaid is associated with a highly signi…cant 15-20% increase in prescription drug spending (by the government). This increase is not accompanied by a corresponding change in the number of prescriptions, and I can rule out an increase in excess of 9%, with 95% con…dence. As such, increases in drug spending could instead come through changing prescription composition, such as the use of more branded or of fewer generic drugs. These more expensive drugs could more e¤ectively substitute for other types of care, such as hospital or outpatient services; as such, plans would have every incentive to use these expensive drugs (given they don’t bear their cost), since these could substitute for services that plans would otherwise have to pay for.
I also instrument for private Medicaid status using my primary strategy, involving age 65. However, the results from this strategy might not re‡ect the true magnitude of cost changes; individuals here would be switching from private to public Medicaid, and inertia could bias against downgrading to less expensive drugs, but might not bias against upgrading to more expensive ones. This said, while the estimates here are more modest, they still imply 10% higher drug expenditures under public than under private Medicaid, with the results presented in the bottom panel. Note that
to ensure consistency with the top panel, I invert the coe¢ cient of interest to be Initially Private*Pre 65 (rather than Initially Private*Post 65). While the top panel focuses on the mandate period of 2004-2010, the bottom panel extends from 1999 to 2005. The bottom panel excludes the subsequent period, given the 2006 shift in drug coverage from Medicaid to Medicare (from the intro of Part D), for those with supplementary Medicare coverage.
E¤ ect of Incomplete Contracting: Under Bundling of Prev. Excluded Services
I proceed to examine the e¤ect of bundling prescription drug services into existing private Medicaid contracts, which was implemented in October 2011. I try to capture the di¤erence between an incomplete contract and a (more) complete counterfactual (at least with respect to prescription drug services), while holding other factors con- stant. For example, the set of active contracts does not change throughout the period on which I focus (three months pre and post), making my results robust to compo- sitional changes in contracts. Further, I hold …xed the set of enrollees, focusing on disabled individuals who were enrolled in private Medicaid three months prior to the carve-in (July 2011), and still enrolled as of December 2011 (note that this amounts to about 95% of the original July cohort). Unfortunately, since my data only extends through December 2011, I will mostly be capturing the short-run and not the long-run e¤ect.
Altogether, I …nd that bundling reduces prescription drug expenditures, and that this reduction is driven primarily by shifts to less expensive drugs (rather than by a decrease in the overall number of prescriptions). I also demonstrate that these results are not driven by pre-trends. This said, I do …nd evidence of a post-trend, which suggests the e¤ect of bundling isn’t instantaneous. The estimates using this approach-which isolates the e¤ect of incomplete contracting-are consistent with those
from previous approach (which captures the combined e¤ect of incomplete contracting and managed care). Throughout these analyses, which are shown in Table 11, all observations and outcome variables are set at a person-month level. In addition, all point estimates are denoted relative to the baseline month-September 2011-which immediately precedes the carve-in.
Looking at changes in person-month prescriptions from September to December 2011, I …nd an increase of .366 in overall prescriptions (amounting to 15%), which breaks down to a decrease in branded prescriptions of .212 (or about 20%), and
an increase in generics of .441 (also about 20%).10 To measure utilization, I also
construct a standardized measure of drug costs11, and …nd a decrease of about $57
per person-month (or 17%) from September to December 2011.
Finally, I …nd that actual government spending, per individual in private Medic- aid, decreases by a highly signi…cant $35/month (or 4%) from September to December 2011. This result suggests that just one form of incomplete contracting-the exclusion of prescription drugs from private Medicaid contracts-increased contracting costs by 4%. This estimate provides empirical support for existing theory, showing that in- complete contracting can indeed substantially increase contracting costs. In addition, since I look at only one type of incomplete contracting, this …nding should be viewed as a ‡oor estimate for incomplete contracting’s overall impact.
In results not shown here, I examine whether the reduction in drug spending, through the carve-in, is accompanied by an inpatient utilization o¤set. I …nd no signi…cant change to inpatient utilization following the change, and can rule out an increase in excess of 5% of the baseline, although this only re‡ects short-run impact.
10Note that these classi…cations were not available for all drugs, and hence that the sum of the following estimates won’t correspond to the main result.
11This re‡ect average drug prices in public Medicaid. As such, this measure is not a¤ected by potential price di¤erences (pre & post-carve in) for the same drug.
In other results not shown here, I consider the mechanisms by which plans a¤ect drug use, following bundling. Anecdotally, these e¤ects could come from restrictive formularies implemented by plans, placing more stringent limits on use of branded and expensive drugs than exist under the public option.
I also consider the extent to which an additional mechanism drives these results- a shift to di¤erent providers. To do so, I use prescription-level data, and look at whether the e¤ect of the carve-in on proportion of branded drugs is at all sensitive to the inclusion of provider FE’s (corresponding to the prescribing provider); I …nd that the results are not sensitive to the inclusion of these FE’s, suggesting that the e¤ect is mediated through within-provider behavioral changes, rather than shifts to di¤erent providers. The imposition of stringent formularies, which was mentioned previously, could explain some of this changing physician behavior.