IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Fiona Scott Morton
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.nber.org/papers/w5717.pdf
    Download Restriction: no

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5717.

    as
    in new window

    Length:
    Date of creation: Aug 1996
    Date of revision:
    Publication status: published as RAND Journal of Economics, Vol.28, no.2 (1997).
    Handle: RePEc:nbr:nberwo:5717
    Note: IO
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
    Email:


    More information through EDIRC

    References listed on IDEAS
    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.:

    as in new window
    1. 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 1010-28, October.
    2. 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.
    3. 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.
    4. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 393-406, October.
    5. 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.
    6. 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 365-83, July.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5717. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.