The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules
In 1990 the Federal Government included a Most Favored Customer (MFC) clause in the contract (OBRA 90) which would govern the prices paid to firms for pharmaceutical products supplied to Medicaid recipients. The firms had to give Medicaid their best (lowest) price in some cases, a percentage below average price in others. Many theoretical models have shown that an MFC rule commits a firm to compete less aggressively in prices. We might expect prices to rise following the implementation of the MFC rule, yet the work done to date on OBRA 90 has found this result somewhat difficult to show empirically. I also conclude that the effects of the law are small and relatively weak; however, the results are strongest where the product's characteristics match the incentives in the law. I find that after the MFC rule was implemented the average price of branded products facing generic competition rose - the median presentation's price rose about 4%. Brands protected by patents did not significantly increase price. Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC. I find support for the strategic effect; generic firms raise their prices more as their markets become more concentrated. I find little change in hospital prices. The results suggest that the MFC rule resulted in higher prices to some non-Medicaid consumers of pharmaceuticals.
|Date of creation:||Aug 1996|
|Publication status:||published as RAND Journal of Economics, Vol.28, no.2 (1997).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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.:
- Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
- Png, I P L & Hirshleifer, D, 1987. "Price Discrimination through Offers to Match Price," The Journal of Business, University of Chicago Press, vol. 60(3), pages 365-383, July.
- Png, I P L, 1991. "Most-Favored-Customer Protection versus Price Discrimination over Time," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1010-1028, October.
- Crocker, Keith J & Lyon, Thomas P, 1994.
"What do Facilitating Practices Facilitate? An Empirical Investigation of Most-Favored-Nation Clauses in Natural Gas Contracts,"
Journal of Law and Economics,
University of Chicago Press, vol. 37(2), pages 297-322, October.
- Crocker, K.J. & Lyon, T.P., 1993. "What Do "Facilitating Practices" Facilitates? An Empirical Investigation of Most-Favored Nation Clauses in Natural Gas Contracts," Papers 10-93-2, Pennsylvania State - Department of Economics.
- Steven Salop, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 393-406.
- Charles A. Holt & David T. Scheffman, 1987. "Facilitating Practices: The Effects of Advance Notice and Best-Price Policies," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 187-197, Summer. Full references (including those not matched with items on IDEAS)