Profiting from Most-Favored Customer Procurement Rules: Evidence from Medicaid

Using a difference-in-difference approach, we find that an increase to Medicaid’s
minimum drug rebate under the Affordable Care Act in 2010 lowered non-Medicaid
drug spending by 2.5 percent. A stylized bargaining model shows that this is likely
driven by the interaction of this reform with Medicaid’s “most-favored customer”
clause (MFCC). By examining the response of drugs that faced a change in incentives
equivalent to the removal of Medicaid’s MFCC, we estimate that removing the Medicaid
MFCC would have reduced overall 2010 non-Medicaid drug spending by an
additional 3.5 percent, though it would have likely also increased Medicaid spending.

Keywords: Medicaid, Pharmaceutical Market, Bargaining, Most-Favored Customer Clauses, Procurement

JEL Classification: C78, I11, I38, L11, L65

Suggested Citation: Suggested Citation

Feng, Josh and Hwang, Thomas and Maini, Luca, Profiting from Most-Favored Customer Procurement Rules: Evidence from Medicaid (February 26, 2020). American Economic Journal: Economic Policy, volume 15, issue 2, 2023[10.1257/pol.20200688], Available at SSRN: https://ssrn.com/abstract=3544987 or http://dx.doi.org/10.1257/pol.20200688