Download this Paper Open PDF in Browser

The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing

40 Pages Posted: 14 Dec 2004  

Mark Duggan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: November 2004

Abstract

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.

Suggested Citation

Duggan, Mark and Scott Morton, Fiona M., The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing (November 2004). NBER Working Paper No. w10930. Available at SSRN: https://ssrn.com/abstract=622874

Mark G. Duggan (Contact Author)

University of Maryland - Department of Economics ( email )

3115C Tydings Hall
College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fiona M. Scott Morton

Yale School of Management ( email )

New Haven, CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
55
Rank
316,385
Abstract Views
1,323