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The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules

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  • Fiona Scott Morton

Abstract

In 1991 a most-favored customer (MFC) rule was adopted to govern pharmaceutical prices paid by Medicaid. Theoretical models show that an MFC rule commits a firm to compete less aggressively in prices. I find that the price of branded products facing generic competition rose (4% on average). Brands protected by patents did not significantly increase in price. Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC; I find that generic firms raise price more as their markets become concentrated. Hospital prices show little change. The results suggest that the MFC rule caused higher prices for some pharmaceutical customers.

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  • Fiona Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 269-290, Summer.
  • Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:269-290
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    Citations

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    Cited by:

    1. Jonathan Gruber, 2003. "Medicaid," NBER Chapters,in: Means-Tested Transfer Programs in the United States, pages 15-78 National Bureau of Economic Research, Inc.
    2. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
    3. Bulow, Jeremy I. & Klemperer, Paul, 1999. "The Tobacco Deal," CEPR Discussion Papers 2125, C.E.P.R. Discussion Papers.
    4. repec:bin:bpeajo:v:29:y:1998:i:1998-3:p:323-394 is not listed on IDEAS
    5. Kyna Fong & Michael Schwarz, 2009. "Towards an Efficient Mechanism for Prescription Drug Procurement," NBER Working Papers 14718, National Bureau of Economic Research, Inc.
    6. Patricia M. Danzon & Jonathan D. Ketcham, 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," NBER Chapters,in: Frontiers in Health Policy Research, Volume 7, pages 1-54 National Bureau of Economic Research, Inc.
    7. Iain M. Cockburn & Aslam H. Anis, 2001. "Hedonic Analysis of Arthritis Drugs," NBER Chapters,in: Medical Care Output and Productivity, pages 439-462 National Bureau of Economic Research, Inc.
    8. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-34, January.
    9. Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March.
    10. David Dranove & Christopher Ody & Amanda Starc, 2017. "A Dose of Managed Care: Controlling Drug Spending in Medicaid," NBER Working Papers 23956, National Bureau of Economic Research, Inc.
    11. Hamelmann, Lisa & Haucap, Justus & Wey, Christian, 2015. "Die wettbewerbsrechtliche Zulässigkeit von Meistbegünstigungsklauseln auf Buchungsplattformen am Beispiel von HRS," DICE Ordnungspolitische Perspektiven 72, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Gönenç Gürkaynak & Ayşe Güner & Sinan Diniz & Janelle Filson, 2016. "Most-favored-nation clauses in commercial contracts: legal and economic analysis and proposal for a guideline," European Journal of Law and Economics, Springer, vol. 42(1), pages 129-155, August.
    13. Glazer Jacob & Huskamp Haiden A. & McGuire Thomas G., 2012. "A Prescription for Drug Formulary Evaluation: An Application of Price Indexes," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-26, March.
    14. Decarolis, Francesco, 2015. "The unintended effects of the Medicare Part D low income subsidy," Health Policy, Elsevier, vol. 119(5), pages 597-603.
    15. Spier, Kathryn E., 2001. "The Use of “Most-Favored-Nation†Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series qt7hm4d39g, Berkeley Olin Program in Law & Economics.

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