How do hospitals respond to managed care? Evidence from at-risk newborns

Medicaid has increasingly transitioned from a government-run fee-for-service system (FFS) to a managed care system (MMC) administered by private insurers. To examine the effect of MMC, I exploit an arbitrary determinant of MMC enrollment in New York State: infants weighing less than 1200 g were excluded from MMC and were instead served through FFS. I find evidence that MMC reduces hospital costs at birth, which is driven by infants born in New York City. The hospital cost reductions arise from shortening the lengths of stay and encouraging inter-hospital transfers. These results are consistent with health plans influencing hospitals to reduce the intensity of treatment and steering patients away from high-cost hospitals.