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The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing

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  • Mark Duggan
  • Fiona Scott Morton

Abstract

The federal-state Medicaid program insures 43 million people for virtually all of the prescription drugs approved by the FDA. To determine the price that it will pay for a drug treatment, the government uses the average price in the private sector for that same drug. Assuming that Medicaid recipients are unresponsive to price because of the program's zero co-pay, this rule will increase prices for non-Medicaid consumers. Using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002, we investigate the relationship between the Medicaid market share (MMS) and the average price of a prescription. Our findings suggest that the Medicaid rules substantially increase equilibrium prices for non-Medicaid consumers. Specifically, a ten percentage-point increase in the MMS is associated with a ten percent increase in the average price of a prescription. This result is robust to the inclusion of controls for a drug's therapeutic class, the existence of generic competition, the number of brand competitors, and the years since the drug entered the market. We also demonstrate that the Medicaid rules increase a firm's incentive to introduce new versions of a drug at higher prices and find empirical evidence in support of this for drugs that do not face generic competition. Taken together, our findings suggest that government procurement can have an important effect on equilibrium prices in the private sector.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10930.

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Date of creation: Nov 2004
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Publication status: published as Duggan, Mark and Fiona M. Scott Morton. "The Distortionary Effects Of Government Procurement: Evidence From Medicaid Prescription Drug Purchasing," Quarterly Journal of Economics, 2006, v121(1,Feb), 1-30.
Handle: RePEc:nbr:nberwo:10930

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  1. Currie, Janet & Grogger, Jeffrey, 2002. "Medicaid expansions and welfare contractions: offsetting effects on prenatal care and infant health?," Journal of Health Economics, Elsevier, Elsevier, vol. 21(2), pages 313-335, March.
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  3. Jonathan Gruber & Aaron Yelowitz, 1997. "Public Health Insurance and Private Savings," UCLA Economics Working Papers, UCLA Department of Economics 772, UCLA Department of Economics.
  4. Duggan, Mark, 2005. "Do new prescription drugs pay for themselves?: The case of second-generation antipsychotics," Journal of Health Economics, Elsevier, Elsevier, vol. 24(1), pages 1-31, January.
  5. Joan-Ramon Borrell, 1999. "Pharmaceutical Price Regulation: A Study on the Impact of the Rate-of-Return Regulation in the UK," PharmacoEconomics, Springer Healthcare | Adis, Springer Healthcare | Adis, vol. 15(3), pages 291-303.
  6. David M. Cutler & Jonathan Gruber, 1995. "Does Public Insurance Crowd Out Private Insurance?," NBER Working Papers 5082, National Bureau of Economic Research, Inc.
  7. Robert A. Moffitt, 2003. "Means-Tested Transfer Programs in the United States," NBER Books, National Bureau of Economic Research, Inc, number moff03-1.
  8. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 6(1), pages 75-90, 03.
  9. Richard G. Frank & David S. Salkever, 1995. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc.
  10. Olson, Mary, 1996. "Substitution in Regulatory Agencies: FDA Enforcement Alternatives," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 12(2), pages 376-407, October.
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Cited by:
  1. Newhouse, Joseph Paul & Berndt, Ernst R., 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," Scholarly Articles 4450127, Harvard Kennedy School of Government.
  2. Rob Valletta, 2007. "The costs and value of new medical technologies: symposium summary," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue jul6.
  3. Claudio Lucarelli & Sean Nicholson & Minjae Song, 2010. "Bundling Among Rivals: A Case of Pharmaceutical Cocktails," NBER Working Papers 16321, National Bureau of Economic Research, Inc.
  4. García-Alonso, M. D. C. & Mariñoso, B. G., 2005. "The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations," Working Papers, Department of Economics, City University London 05/02, Department of Economics, City University London.
  5. Cheung, Cherry & Coucke, Kristien & Neicu, Daniel, 2011. "A Decision Tree as a Quick Scan for Effective Market Functioning," Working Papers, Hogeschool-Universiteit Brussel, Faculteit Economie en Management 2011/06, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  6. Antonio Cabrales & Sergi Jiménez-Martín, 2008. "The Determinants of Pricing in Pharmaceuticals: Are U.S. prices really so high?," Working Papers 2008-18, FEDEA.
  7. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 11(2), pages 1-34, January.
  8. Kotsios, Panayotis, 2010. "Regulatory Barriers to Entry in Industrial Sectors," MPRA Paper 27976, University Library of Munich, Germany.
  9. Mark Duggan & Patrick Healy & Fiona Scott Morton, 2008. "Providing Prescription Drug Coverage to the Elderly: America's Experiment with Medicare Part D," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 69-92, Fall.
  10. Kyna Fong & Michael Schwarz, 2009. "Towards an Efficient Mechanism for Prescription Drug Procurement," NBER Working Papers 14718, National Bureau of Economic Research, Inc.
  11. Leemore Dafny & David Dranove, 2006. "Regulatory Exploitation and the Market for Corporate Controls," NBER Working Papers 12438, National Bureau of Economic Research, Inc.

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