Shifting financial risk from the public to the private sector is an increasingly attractive option to policymakers seeking to constrain Medicaid costs. This paper discusses the potential advantages and disadvantages of private insurance arrangements for Medicaid recipients and examines the Texas Purchased Health Services Program, the oldest and largest private insurance program for Medicaid recipients in the U.S. Our analysis of the Texas program suggests that while the political benefits are real, the administrative costs are substantial and the fiscal benefits uncertain. While overall benefits may outweigh costs in Texas, differing political and fiscal circumstances may alter the balance in other states considering private insurance arrangements.

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