Provider Selection, Bargaining, and Utilization Management in Managed Care

Managed care controls cost through a combination of provider selection, bargaining, and utilization management. Provider selection will reduce expenditures if patients are funneled to efficient providers. Bargaining will reduce expenditures through lower rates. Utilization management will reduce expenditures if providers reduce treatment intensity due to monitoring. We estimate that about 30% of the reduction in inpatient expenditures in a mental health carve‐out was due to provider selection, 5% was due to bargaining, and the remaining 65% was due to utilization management. We find that both the provider selection and utilization management effects were likely to be welfare improving.