Medicaid program choice, inertia and adverse selection

Abstract

In 2012, Kentucky implemented Medicaid managed care statewide, auto-assigned enrollees to three plans, and allowed switching. Using administrative data, we find that the state’s auto-assignment algorithm most heavily weighted cost-minimization and plan balancing, and placed little weight on the quality of the enrollee-plan match. Immobility − apparently driven by health plan inertia − contributed to the success of the cost-minimization strategy, as more than half of enrollees auto-assigned to even the lowest quality plans did not opt-out. High-cost enrollees were more likely to opt-out of their auto-assigned plan, creating adverse selection. The plan with arguably the highest quality incurred the largest initial profit margin reduction due to adverse selection prior to risk adjustment, as it attracted a disproportionate share of high-cost enrollees. The presence of such selection, caused by differential degrees of mobility, raises concerns about the long run viability of the Medicaid managed care market without such risk adjustment.