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July 9, 2026

Privatizing Medicaid

A natural experiment in Louisiana shows private plans can cut drug costs without reducing observed quality.

Tyler Smith

Source: diego cervo

When governments transfer public health programs to private firms, the promise is to lower costs while providing the same quality of healthcare. Whether privatization actually delivers on that promise has been hard to measure because the people who end up in public versus private systems often differ in ways that bias direct comparisons. 

In a paper in the American Economic Review, authors Danil Agafiev Macambira, Michael Geruso, Anthony Lollo, Chima D. Ndumele, and Jacob Wallace examine the effects of privatizing social health insurance by exploring a natural experiment set in Louisiana Medicaid, where nearly 100,000 enrollees were randomly assigned to either a publicly run fee-for-service (FFS) system or a private managed care plan.

The authors found that private managed care plans reduced total spending by 5.6 percent, primarily through management of pharmacy benefits and lower prices for outpatient services. 

Figure 2 from the authors’ paper illustrates the main patterns.

Figure 2 from Macambira et al. (2026)

The chart presents four difference-in-differences event-study panels, each plotting the difference in quarterly spending—over roughly four years—between enrollees assigned to a private managed care plan and those assigned to an FFS plan. Time is measured in quarters relative to the start of managed care along the horizontal axis. Two vertical lines mark key dates: the launch of managed care and the time when prescription drugs became the financial responsibility of the private plans, the so-called pharmacy carve-in. 

The total spending panel shows no significant difference before treatment, followed by a decline afterward. The outpatient panel shows a reduction that appears immediately following treatment, the inpatient panel shows no effect, and the pharmacy panel shows the largest drop—after drugs were carved into the private plans.

Drug spending fell 25 percent, driven not by filling fewer prescriptions but by substitution toward cheaper generics and lower-cost alternatives within the same therapeutic class, drugs that have the same purpose but different chemical compositions. Private plans achieved reductions through real-time pharmacy claim denials, which occur before a drug is dispensed at the pharmacy, and allow plans to redirect patients to less expensive alternative medications. Public (FFS) faced more frequent denials at the pharmacy, but these denials were not targeted in a way that led to cost savings.

Savings related to other medical benefits were modest and came with reductions in primary and preventive care, a rise in avoidable emergency department visits, and lower measured quality. Enrollees assigned to private managed care plans were more than three times as likely to switch plans, suggesting higher levels of dissatisfaction.

The authors conclude that the strongest case for privatization lies in the management of pharmacy benefits, where private firms cut spending without detectable harms.