How to save Medicaid dollars? Remove Medicaid’s insurer middlemen

Physicians for a National Health Plan has just released a report, Removing the Middlemen from Medicaid: A Blueprint for Better Care and Lower Costs, showing that the most cost-effective way to strengthen Medicaid is for states to end their Medicaid contracts with managed care organizations (MCOs). Direct state administration of Medicaid could save states a total of about $34 billion a year, between 10 and 17 percent of their Medicaid budgets. Savings come from reduced administrative expenses and care coordination.

Here’s the report’s Executive Summary:

Background: Medicaid is a joint federal and state health insurance program for people with low incomes. As of April 2025, Medicaid insured 71 million people, including people with disabilities, children and families, pregnant women, the elderly, and working adults without affordable insurance. In addition, Medicaid supports the overall health infrastructure, funding safety-net and rural hospitals, as well as long-term care facilities that serve a large proportion of low-income individuals. In these ways, Medicaid stabilizes healthcare for entire communities.

Issue: The 2025 Budget Reconciliation Act (sometimes identified as the “One Big Beautiful Bill Act”) reduces federal Medicaid funding by $1 trillion over the next decade. A cut of this magnitude puts enormous pressure on states to end optional Medicaid benefits, cut eligibility, reduce provider payments, and/or raise taxes.

Solution: States that rely on managed care organizations (“MCOs”) to administer their Medicaid programs can substantially offset the federal cuts if they stop MCO contracting and instead directly administer their Medicaid programs. We estimate that if states shifted from MCOs to direct payment of Medicaid providers, they could reduce their Medicaid MCO expenditures by 10 percent to 17 percent. Savings stem from reduced administrative costs and improved care coordination.

States can operate their Medicaid programs in a manner that encourages primary care practices to manage care. This is called “managed fee for service” (Connecticut Medicaid) or “enhanced Primary Care Case Management” (North Carolina and Oklahoma prior to recent conversion to MCOs). These models include enhanced payment to primary care practices, care coordination programs to improve management of complex and high-risk patients in the community beyond the doctor’s office, and specialized programs for patients with complex care needs.

Rationale: States spend 4 to 6 percent of their Medicaid budget on internal state agency overhead, plus an additional 13 percent goes to MCOs for their overhead. States that bypass MCOs and pay providers directly can either retain much of what today goes to MCO overhead or re-invest some of those savings back into Medicaid. When a state deprivatizes its Medicaid program, it obviously no longer has to fund MCO overhead. Total state overhead can drop to about 4 to 6 percent or less.

A well-run managed fee for service program can attract primary care physicians back into Medicaid, as demonstrated in Connecticut. This, in turn, can reduce urgent care, ER visits, and preventable hospitalizations, resulting in a net reduction in the cost of medical services. In 2012, Connecticut terminated its MCO contracts and implemented a state-run care coordination program. Physician participation improved by 33% in the first year after the change, and ER visits and hospitalizations declined, with a reduction in total per member Medicaid cost of 15% five years after the conversion to state-run care coordination.

Connecticut’s switch from a privatized to a deprivatized program coupled with a new publicly run care coordination program improved quality of care. For example, the change was associated with a 4.7% increase in early cancer detection and 8% higher survival rates compared to New Jersey, which maintained its privately run Medicaid MCO program as Connecticut jettisoned it. In the 13 intervening years, the state of Connecticut has saved more than $4 billion of taxpayer money.

In Appendix F (Table 4), we provide a range of projections for the savings a state can anticipate if it moves to a managed fee for service model, varying based on how much care coordination they adopt. The projections are a first-order approximation that does not account for items identified in the notes section to the table that could imply either under-estimation or over-estimation. As one example of under-estimation, these projections are based on FY 2023 state data and do not account for medical inflation in FY 2026.

Table 4 also demonstrates the federal savings opportunity. Total federal MCO Medicaid spending in 2023 was $ 256 billion. We estimate that nationwide deprivatization of Medicaid would have saved the federal government as much as $43 billion in 2023, in addition to the potential for $34 billion savings for individual states, for a total savings of $77 billion combining all state and federal fractions.

Some states that decided to eliminate managed care from Medicaid have been able to move quickly into managed fee for service. For example, after two years of consideration, the Oklahoma board overseeing Medicaid decided on November 7, 2003 to remove MCOs effective on December 31 2003, and fully transitioned to statewide Primary Care Case Management over the first four months of 2004.

In this report we will frequently refer to the state of Connecticut where, in 2012, the state successfully removed MCOs from its Medicaid program. Although it is a small state with about a million Medicaid enrollees, it has actual, recent experience with deprivatization, and so the amount of money saved, administrative costs avoided and access improved there are highly instructive. Connecticut is widely recognized as “the insurance capitol of the world.” If a state with Connecticut’s legacy could remove the insurance industry from its Medicaid program, and reap significant rewards, any state should be able to do the same.

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