Competition in imperfect markets

"Poor and uneducated patients may not know what health care is desirable and, if fully insured, have little incentive to minimize the costs of their care. Partly in response to these concerns, most states have moved a substantial portion of their Medicaid caseloads out of traditional competitive fee-for-service (FFS) care, and into mandatory managed care (MMC) plans that severely restrict the choice of provider. We use a unique longitudinal data base of California births in order to examine the impact of this policy on pregnant women and infants. California phased in MMC creating variation in the timing of MMC. We identify the effects of MMC using changes in the regime faced by individual mothers between births. Some counties adopted single-carrier plans, while others adopted regimes with at least two carriers. Hence, we also ask whether competition between at least two carriers improved MMC outcomes. We find that MMC reduced the quality of prenatal care and increased low birth weight, prematurity, and neonatal death. Our results suggest that the competitive FFS system provided better care than the new MMC system, and that requiring the participation of at least two plans did not improve matters"--National Bureau of Economic Research web site.