A Dose of Managed Care: Controlling Drug Spending in Medicaid

We study the effect of privatizing Medicaid drug benefits on drug prices and utilization. Drug spending would decrease by 21.3 percent if private insurers administered all drug benefits. One-third of the decrease is driven by private insurers' ability to negotiate prices with pharmacies. The remaining two-thirds is driven by the greater use of lower cost drugs, such as generics, and is only realized in states that give private insurers the flexibility to design drug benefits. Privatization does not reduce prescriptions per enrollee and spending cuts are smaller for drugs that lower medical spending.

Automated summary

The study shows that privatizing Medicaid drug benefits leads to a significant decrease in drug spending by allowing private insurers to negotiate prices with pharmacies and increasing the use of lower cost drugs. The reduction in spending is not due to a decrease in prescriptions per enrollee and is smaller for drugs that lower medical spending.