The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing
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.
|Date of creation:||Nov 2004|
|Date of revision:|
|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.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jonathan Gruber & Aaron S. Yelowitz, 1998.
"Public Health Insurance and Private Savings,"
JCPR Working Papers
42, Northwestern University/University of Chicago Joint Center for Poverty Research.
- Jonathan Gruber & Aaron Yelowitz, 1997. "Public Health Insurance and Private Savings," UCLA Economics Working Papers 772, UCLA Department of Economics.
- J. Gruber & A. Yelowitz, . "Public Health Insurance and Private Savings," Institute for Research on Poverty Discussion Papers 1135-97, University of Wisconsin Institute for Research on Poverty.
- Jonathan Gruber & Aaron Yelowitz, 1997. "Public Health Insurance and Private Savings," NBER Working Papers 6041, National Bureau of Economic Research, Inc.
- David M. Cutler & Jonathan Gruber, 1995.
"Does Public Insurance Crowd Out Private Insurance?,"
NBER Working Papers
5082, National Bureau of Economic Research, Inc.
- Cutler, David M & Gruber, Jonathan, 1996. "Does Public Insurance Crowd Out Private Insurance?," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 391-430, May.
- A. S. Yelowitz, .
"The Medicaid notch, labor supply, and welfare participation: Evidence from eligibility expansions,"
Institute for Research on Poverty Discussion Papers
1084-96, University of Wisconsin Institute for Research on Poverty.
- Yelowitz, Aaron S, 1995. "The Medicaid Notch, Labor Supply, and Welfare Participation: Evidence from Eligibility Expansions," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 909-39, November.
- Aaron Yelowitz, 1995. "The Medicaid Notch, Labor Supply and Welfare Participation: Evidence from Eligibility Expansions," UCLA Economics Working Papers 738, UCLA Department of Economics.
- Duggan, Mark, 2005. "Do new prescription drugs pay for themselves?: The case of second-generation antipsychotics," Journal of Health Economics, Elsevier, vol. 24(1), pages 1-31, January.
- Richard G. Frank & David S. Salkever, 1997.
"Generic Entry and the Pricing of Pharmaceuticals,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 6(1), pages 75-90, 03.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- 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, vol. 15(3), pages 291-303.
- Olson, Mary, 1996. "Substitution in Regulatory Agencies: FDA Enforcement Alternatives," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(2), pages 376-407, October.
- Janet Currie & Jeffrey Grogger, 2000.
"Medicaid Expansions and Welfare Contractions: Offsetting Effects on Prenatal Care and Infant Health?,"
NBER Working Papers
7667, National Bureau of Economic Research, Inc.
- Currie, Janet & Grogger, Jeffrey, 2002. "Medicaid expansions and welfare contractions: offsetting effects on prenatal care and infant health?," Journal of Health Economics, Elsevier, vol. 21(2), pages 313-335, March.
- Robert A. Moffitt, 2003. "Means-Tested Transfer Programs in the United States," NBER Books, National Bureau of Economic Research, Inc, number moff03-1, December.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10930. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.