Medicaid was established in 1965 as a system of federal matching funds for states to deliver health care to low-income Americans. Initially, all states paid directly for medical services, but they increasingly subcontracted with private insurers, known as Managed Care Organizations, to administer and procure care. By 2024, 42 states employed MCOs to deliver Medicaid benefits to 78 percent of the program’s enrollees—at a cost of $491 billion.
That arrangement raises uncomfortable questions. Why do states subcontract Medicaid to private insurers if the government provides all the money, tells the insurers what they must cover and how much they have to pay for it, and doesn’t competitively bid the contracts? What’s the point of these middle men?
The answer, as I show in a new Manhattan Institute report, is that private insurers are exempt from normal limits on fees that states can claim from the federal government to finance Medicaid services. Routing money through these firms makes funding much harder to track—in turn letting states obtain billions of dollars in federal aid every year for purposes Congress never approved.
Private insurers are very efficient & adept at extracting money from the federal government.