Medicaid is a joint state-federal program that addresses the barrier to health care faced by low- income Americans. Medicaid provides health coverage to over 52 million Americans, a 10- million person increase from 2007, and represents the second-largest budget item at both the federal domestic and state budgets. As a result of the increasing size and scope of Medicaid, states have looked for ways to contain spending. Traditional Medicaid is financed on a fee-for- service (FFS) basis, but states increasingly use risk-based, capitated contracts with private managed care organizations. While the use of managed care has been expanding, the effects of managed care on access and utilization are not well understood in the literature and, empirically, its effects have not been consistent across states. This dissertation will examine two factors that are likely to affect beneficiaries' access and utilization of services: the degree of vertical integration of managed care insurers and the level of market competition. To address the challenges of this field of study, this research strategy uses an instrumental variable approach based on a unique source of identification: state budget shocks. The proposed instrumental variable approach presents a significant methodological contribution. States often expand managed care in stages on the basis of beneficiary eligibility or county. The correlations between basis of eligibility and health outcome complicate studies of managed care effects' on health outcomes. Geography-based enrollment may also introduce bias because states likely choose counties based on the health expenditures of beneficiaries. To circumvent these issues of endogeneity, this dissertation will consider state budgetary shocks as an exogenous source of variation in the use of managed care. An unexpected change in tax revenue or spending is likely to increase the state's demand for managed care, but it is unlikely to influence the health outcomes observed in managed care. Establishing a strong instrumental variable for Medicaid managed care enrollment would represent a significant contribution to research methodology. This study will have important implications for public health, health economics, and public finance. This analysis will address a critical question about how Medicaid beneficiaries are affected by managed care markets. From a health economic perspective, the model underlying the empirical analysis extends previous theoretical work on insurer competition within a principal-agent framework.
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