Infants born at full term have better health outcomes. However, one in ten babies in the United States are born via a medically unnecessary early elective delivery: induction of labor, a cesarean section, or both before thirty-nine weeks gestation. In 2011 the Texas Medicaid program sought to reduce the rate of early elective deliveries by denying payment to providers for the procedure. We examined the impact of this policy on clinical care practice and perinatal outcomes by comparing the changes in Texas relative to comparison states. We found that early elective delivery rates fell by as much as 14 percent in Texas after this payment policy change, which led to gains of almost five days in gestational age and six ounces in birthweight among births affected by the policy. The impact on early elective delivery was larger in magnitude for minority patients. Other states may look to this Medicaid payment reform as a model for reducing early elective deliveries and disparities in infant health.