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The Distortionary Effects of Government Procurement: Evidance From Medicaid Prescription Drug Purchasing
Abstract
In 2003 the federal-state Medicaid program provided prescription drug coverage to more than 50 million people. To determine
the price that it will pay for each drug, Medicaid uses the average private sector price. When Medicaid is a large part of
the demand for a drug, this creates an incentive for its maker to increase prices for other health care 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 estimates imply that a 10-percentage-point increase in the
MMS is associated with a 7 to 10 percent increase in the average price of a prescription. In addition, the Medicaid rules
increase a firm's incentive to introduce new versions of a drug in order to raise price. We find empirical evidence that firms
producing newer drugs with larger sales to Medicaid are more likely to introduce new versions. Taken together, our findings
suggest that government procurement rules can alter equilibrium price and product proliferation in the private sector.
... Public procurement both in final products markets and in wholesale markets can generate market distortions of a ‗waterbed-type' (BundesKartellamt, 2008) that can result in higher prices in the nonpublic fringe of the market (and, particularly, for consumers) (as empirically tested by Scott Morton, 1997; and Duggan & Scott Morton, 2006). In order to properly assess when the public buyer is to be found in such a competitive position, the characteristics of the sourced goods or services (or of the admissible suppliers) that are ‗created' by public procurement regulations themselves should be disregarded because, in the absence of public procurement regulations, the public buyer would be shopping in the exact same markets as undertakings and consumers do. ...
... The aggregate effect of the reduction in competition in both wholesale and retail markets is very likely to produce a loss of total welfare (Doyle & Inderst, 2007; Dobson & Inderst, 2007 & 2008 Inderst & Valletti, 2008). Public procurement both in final products markets and in wholesale markets can generate market distortions of a ‗waterbed-type' (BundesKartellamt, 2008 ) that can result in higher prices in the nonpublic fringe of the market (and, particularly, for consumers) (as empirically tested by Scott Morton, 1997; and Duggan & Scott Morton, 2006). In order to properly assess when the public buyer is to be found in such a competitive position, the characteristics of the sourced goods or services (or of the admissible suppliers) that are ‗created' by public procurement regulations themselves should be disregarded because, in the absence of public procurement regulations, the public buyer would be shopping in the exact same markets as undertakings and consumers do. ...
Competition is the best means to ensure efficient allocation of resources. Hence, the achievement of value for money depends crucially on the development of public procurement activities in highly competitive markets. However, public procurement can generate significant (negative) effects on market competition dynamics - which, in a significant number of instances, result in a loss of efficiency and, ultimately, of social welfare. Therefore, competition-restrictive public procurement is self-defeating. However, most publicly-generated competition restrictions are avoidable - particularly through the establishment and full-enforcement of a competition principle. Based on the regulatory situation in the European Union, this paper focuses on the relevance of placing a competition principle amongst the basic foundations and goals of public procurement (together with transparency and efficiency), and offers general criteria for the development of a competition-oriented public procurement system that furthers social welfare by means of increased value for money.
... The existing literature on welfare programs is largely silent on the programs' distortionary effects on the market and nonparticipants. A notable exception is Duggan and Morton (2006), which finds that government procurement methods in the Medicaid program can change the equilibrium price of pharmaceuticals and product proliferation in the private sector. Our paper fills the gap by providing empirical evidence that WIC's rebate and auction procurement method serves as a barrier for manufacturers with small market shares to enter or grow in the market. ...
This paper examines the impact of government procurement in social welfare programs on consumers, manufacturers, and the government. We analyze the U.S. infant formula market, where over half of the total sales are purchased by the Women, Infants, and Children (WIC) program. The WIC program utilizes first-price auctions to solicit rebates from the three main formula manufacturers, with the winner exclusively serving all WIC consumers in the winning state. The manufacturers compete aggressively in providing rebates which account for around 85% of the wholesale price. To rationalize and disentangle the factors contributing to this phenomenon, we model manufacturers' retail pricing competition by incorporating two unique features: price inelastic WIC consumers and government regulation on WIC brand prices. Our findings confirm three sizable benefits from winning the auction: a notable spill-over effect on non-WIC demand, a significant marginal cost reduction, and a higher retail price for the WIC brand due to the price inelasticity of WIC consumers. Our counterfactual analysis shows that procurement auctions affect manufacturers asymmetrically, with the smallest manufacturer harmed the most. More importantly, by switching from the current mechanism to a predetermined rebate procurement, the government can still contain the cost successfully, consumers' surplus is greatly improved, and the smallest manufacturer benefits from the switch, promoting market competition.
... This implies that policy proposals restricting list price increases, such as requiring rebates as in the Inflation Reduction Act, may not reduce overall pharmaceutical spending growth in the long run. While the Inflation Reduction Act also permits CMS to eventually negotiate certain drug prices for drugs that have been on the market for many years, the cost savings effects may be dampened if firms respond to inflation caps by entering at a higher price or by introducing new formulations, as suggested by earlier work on Medicaid (Duggan and Scott Morton 2006). Alternatively, if development of new drugs slows, spending will slow more than one might expect, with the clinical consequences dependent on the types of innovations deterred. ...
Context: To what extent does pharmaceutical revenue growth depend on new medicines versus increasing prices for existing medicines? Moreover, does using list prices, as is commonly done, versus prices net of confidential rebates offered by manufacturers, which are harder to observe, change the relative importance of the sources of revenue growth?
Methods: We address these research questions using decomposition methods to analyze list prices, prices net of rebates, and sales for branded pharmaceutical products sold primarily through retail pharmacies using data from SSR Health, LLC.
Findings: From 2009-2019, retail pharmaceutical revenue growth was primarily driven by new products rather than price increases on existing products. Failing to account for confidential rebates creates a more prominent role for price increases in explaining revenue growth, because list price inflation over this period was 10.9% whereas net price inflation was 3.3%.
Conclusions: Policies that restrict price growth on existing medicines likely need to be coupled with policies that lower launch prices to have a meaningful long-term impact on pharmaceutical revenue growth. Using pharmaceutical list prices is often an inadequate approximation for net prices because the role of rebates has increased and varies by drug class.
... In addition to the direct benefits to Medicare, given the role of Medicare in many of these drug markets, the purchasing decisions of the public payer increases private prices. This is both a direct impact of the fact that manufacturers may find higher private prices optimal to increase public payments and of indirect spillovers, as many private firms pay prices that are effectively just a function of the Medicare price (Duggan and Morton 2006). Thus, to the extent that the Medicare price is too high, these private prices are also inefficient. ...
In this article, we develop an economic framework for Medicare reform that highlights trade-offs that reform proposals should grapple with, but often ignore. Central to our argument is a tension in administratively set prices, which may improve short-term efficiency but do so at the expense of dynamic efficiency (slowing innovations in new treatments). The smaller the Medicare program is relative to the commercial market, the less important this is; but in a world where there are no market prices or the private sector is very small, the task of setting prices that are dynamically correct becomes more complex. Reforming Medicare should focus on greater incentives to increase competition between Medicare Advantage plans, which necessitates a role for government in ensuring competition; premium support; less use of regulated prices; and less appetite for countless “pay for performance” schemes. We apply this framework to evaluate Medicare for All proposals.
... However, the incentive to launch new products in order to establish new, higher launch prices may counter this effect if demand is positively correlated across products and rises over time. Duggan and Scott Morton (2006) show that pharmaceutical price regulation can encourage firms to launch new products to establish higher prices. ...
... In the Medicaid program, the government negotiates prices to be paid for drugs using a "most favored nation" clause that insists that drug prices paid by Medicaid be no higher than those paid by other payers. This provision has significantly lowered drug prices in the Medicaid program, albeit with important external impacts on pricing to other payers (Duggan and Scott Morton 2006). An important ongoing policy debate is the efficacy of government price regulation versus reliance on a competitive mechanism in the context of the imperfectly competitive market for pharmaceuticals. ...
The United States has seen a sea change in the way that publicly financed health insurance coverage is provided to low-income, elderly, and disabled enrollees. When programs such as Medicare and Medicaid were introduced in the 1960s, the government directly reimbursed medical providers for the care that they provided, through a classic "single payer system." Since the mid-1980s, however, there has been an evolution towards a model where the government subsidizes enrollees who choose among privately provided insurance options. In the United States, privatized delivery of public health insurance appears to be here to stay, with debates now focused on how much to expand its reach. Yet such privatized delivery raises a variety of thorny issues. Will choice among private insurance options lead to adverse selection and market failures in privatized insurance markets? Can individuals choose appropriately over a wide range of expensive and confusing plan options? Will a privatized approach deliver the promised increases in delivery efficiency claimed by advocates? What policy mechanisms have been used, or might be used, to address these issues? A growing literature in health economics has begun to make headway on these questions. In this essay, I discuss that literature and the lessons for both economics more generally and health care policymakers more specifically.
... A multilicense owner in our setting internalizes the profit implications of all licenses he controls as is the case with colluding, but otherwise independent, single-license owners. Finally, we contribute to the literature on distortions induced by incentive schemes and regulation in various settings such as employee compensation (Oyer, 1998), environmental regulation (Fowlie, 2009;Bushnell and Wolfram, 2012), health care (Duggan and Scott Morton, 2006), and tax avoidance (Goolsbee, 2000). ...
This dissertation consists of three essays in the areas of Industrial Organization and Applied Microeconomics.^ The first essay studies high-tech firms' product portfolio choices under competition. I develop a model of dynamic portfolio adjustments in the context of the Chinese smartphone market, using the product life cycle as an empirically tractable heuristic to capture firms' dynamic incentives in new product introductions. I first show that product life cycles endogenously arise in markets with rapid technological innovations, are heterogeneous across products, and are affected by the level of market competition. I then estimate smartphone demand and manufacturers' variable, maintenance and sunk introduction costs on a detailed monthly market-level dataset of Chinese smartphones between 2009 and 2014. Finally, I use a 2012 large-scale pro-competitive policy introduced by the Chinese government as an experiment to decompose the handset manufacturers' incentives to introduce new products and show that the increased competition reduces the average product's short-run profits by 5% but its lifetime profits by 41% by shrinking its product life cycle. These dynamic incentives have large implications for both consumer welfare gains from product variety and the speed of technology adoption in this market.^ In the second essay, my co-authors and I explore the sensitivity of the U.S. government's ongoing incentive auction to multi-license ownership by broadcasters. We document significant broadcast TV license purchases by private equity firms prior to the auction and perform a prospective analysis of the effect of ownership concentration on auction outcomes. We find that multi-license holders are able to raise spectrum acquisition costs by 22% by strategically withholding some of their licenses to increase the price for their remaining licenses. We analyze a potential rule change that reduces the distortion in payouts to license holders by up to 80%, but find that lower participation could greatly increase payouts and exacerbate strategic effects.^ The third essay studies whether liberalizations of gun permits in the U.S. deterred violent crimes. Setting off an ongoing controversy, Lott and Mustard (1997) famously contended that so-called shall-issue laws (SILs) deterred violent crime. In this controversy the weapon of choice has been the differences-in-differences (DD) estimator applied to state and county panel data spanning various intervals of time. By treating violent crime as a career choice, this essay brings to bear a more general method, a cohort panel data model (CPDM) that incorporates the fundamental dynamic insights regarding entering and exiting a career. Our model distinguishes among three key parameters that jointly determine the effect of SILs on crime, (i) a direct effect on entry decisions, (ii) a surprise effect on exit decisions by individuals who entered criminal careers prior to the passage of SILs, and (iii) a selection effect on exit decisions by those who entered in the presence of SILs. We find significant and time-invariant results that reject the deterrence hypothesis as well as the DD model specification. Our results suggest that passages of SILs contribute to about one third of total violent crimes in 2011, particularly through higher turnover of violent criminals.
... However, the incentive to launch new products in order to establish new, higher launch prices may counter this effect if demand is positively correlated across products and rises over time. Duggan and Scott Morton (2006) show that pharmaceutical price regulation can encourage firms to launch new products to establish higher prices. ...
... The extent of economic or pricing bargaining power of suppliers matter because most public agencies purchase many of their factor inputs, including labor, land, and equipment from profit-maximizing supplier markets. There is some evidence that at least some public agencies bargain relatively poorly with suppliers over input prices [95][96][97]. An analysis of supplier bargaining power is necessary because the degree of competitiveness of supplier markets (and the resulting bargaining power of participants in the supply chain) varies widely across agency supply markets and even across programs within agencies [98][99][100]. ...
Public agency strategic analysis (PASA) is different from public policy analysis because public agency executives face numerous constraints that those performing “unconstrained” policy analysis do not. It is also different from private sector strategic analysis. But because of similar constraints and realities, some generic and private sector strategic analysis techniques can be useful to those carrying out PASA, if appropriately modified. Analysis of the external agency environment (external forces) and internal value creation processes (“value chains”, “modular assembly” processes or “multi-sided intermediation platforms”) are the most important components of PASA. Also, agency executives must focus on feasible alternatives. In sum, PASA must be practical. But public executives need to take seriously public value, and specifically social efficiency, when engaging in PASA. Unless they do so, their strategic analyses will not have normative legitimacy because enhancing public value is not the same as in some versions of public value or in agency “profit maximization”. Although similarly constrained, normatively appropriate public agency strategic analysis is not “giving clients what they want” or “making the public sector business case”. PASA must be both practical and principled.
... En mercados regulados como el espa?ol o el sueco, donde est? muy limitado el incremento de precios de los medicamentos ya introducidos en el mercado, parece que el regulador compensa a los productores a trav?s de precios de lanzamiento relativamente altos (v?ase al respecto Ekelund y Persson, 2003), algo que en el caso de Espa?a se viene produciendo hace ya d?cadas, en relaci?n con una pol?tica muy r?gida de precios que, o no los actualizaba o lo hac?a por debajo de las tasas de inflaci?n (v?ase Lobo, 1992). Curiosamente, se ha detectado una situaci?n similar en Estados Unidos, en el marco de Medicaid (programa p?blico orientado a proveer atenci?n sanitaria b?sicamente a indigentes ), en la medida en la que no acepta aumentos de precios superiores al aumento del IPC (Duggan y Scott Morton, 2006), ni precios por encima de los negociados por los planes privados de salud (OECD, 2008). A efectos de contribuir a la eficiencia asignativa, as? como al equilibrio entre la eficiencia est?tica y la eficiencia din?mica, se sugiere un nuevo marco regulador , m?s estable y transparente, que explicite y jerarquice los criterios considerados , y que est? apoyado en estudios de evaluaci?n ...
Most developed countries regulate prices for on-patent drugs, especially if they are publicly funded. Although theoretical reasons -and therefore shared justifications- exist to intervene, pricing schemes may differ considerably from one country to another, as well as in the course of time. In fact, the current focus has been shifting away from cost considerations (the manufacturer´s perspective) towards value considerations (the user/society perspective). With the support of the current legislation and the scarce empirical evidence available to date, it was concluded that in Spain the intervention does not respond to a value-based pricing approach, namely, the prices of new drugs do not reflect their therapeutic value relative to existing alternatives. Besides, the Spanish case was compared with Sweden and the United States.
Keywords: New Chemical Entities, Therapeutic Innovation, Pharmaceutical Price Regulation, Value-Based Pricing.
... Evidence that several banks coordinated their quotes to manipulate this trimmed mean emerged in 2012. Morton (1997) and Duggan and Morton (2006) study how drug manufacturers distort prices in response to a regulation setting the mandatory rebate for Medicaid as an average of the drug prices faced by non-Medicaid enrollees. For Medicare Part D, Decarolis (2015) studies how insurers use the multiple plans that they offer to increase the subsidy paid by Medicare which, in turn, is a function of the average of plan premiums. ...
We study entry and bidding in procurement auctions where contracts are awarded to the bid closest to a trimmed average bid. These auctions, common in public procurement, create incentives to coordinate bids to manipulate the bid distribution. We present statistical tests to detect coordinated entry and bidding choices. The tests perform well in a validation dataset where a court case makes coordination observable. We use the tests to detect coordination in a larger dataset where it is suspected, but not known. The results are used to interpret a major market shakeout following a switch to first price auctions.
... Instead, I exploit time series variation. The goal of this exercise is similar in spirit to Duggan & Scott Morton (2006), who document price changes in response to Medicaid reimbursement rules: Medicaid pays the average price in the private market. Their data only permits them to examine market outcomes under the average-pricing rule, so they cannot explore the reaction of prices to 11See Stromberg for a discussion of election pivotality. ...
Chapter 1 studies price discrimination in advertising sales to Political Action Committees (PACs) in the 2012 Presidential Election. These groups have grown rapidly - expenditures neared $500 million in the 2012 presidential election - and their effect on elections depends on regulation and its interaction with imperfect competition. While the government tightly proscribes station behavior vis-a-vis official campaigns, it does not protect Political Actions Committees (PACs). Television stations potentially wield considerable power to shape access to the electorate. Using novel data on prices paid for individual ad spots from the 2012 presidential election, I find PACs pay a 40% markup above campaign rates, and that there are differences in prices paid by Republican and Democratic groups for indistinguishable purchases. I then develop and estimate a model of political demand for ad spots, exploiting misalignments of state borders and media markets to address potential price endogeneity. Findings indicate that pricing to PACs reflects buyer willingness-to-pay for viewer demographics. Chapter 2 investigates spillover effects of regulation protecting campaign advertising purchases, a most favored nation clause. This regulation guarantees campaigns the lowest rate received by any advertiser, incentivizing stations to sell less airtime to commercial advertisers to buoy campaign prices. Using spot-level data on presidential campaign advertising purchases from 2012, I find that campaign ad prices drop following the institution of rate regulation (sixty days preceding election day). I then develop a model of station price discrimination, and estimate the effect of regulation on campaign and commercial prices relative to a counterfactual without regulation. Chapter 3, co-authored with Gaston Illanes, studies the effects of potential entry on market outcomes in the context of Washington state's 2012 privatization of liquor sales. Theory indicates that entry, and even the threat of entry, plays a key role in discipling market outcomes. We exploit the post-reform licensure requirement that stores have 10,000 square feet of retail space to estimate the impact of an additional store on price competition. We compare prices and product variety in markets with stores just above versus just below the square footage cutoff.
... First, a growing literature demonstrates significant spillovers from Medicare payment policies into the private sector. Duggan and Scott Morton (2006) and Alpert, Duggan and Hellerstein (2013) show surprising responses to public sector payment idiosyncracies in pharmaceutical markets. White (2013) found a sizable positive relationship between Medicare and private hospital pricing, as did Clemens and Gottlieb (forthcoming) in the outpatient context. ...
The reimbursement rates that private insurers pay to physicians are closely linked to those set by Medicare, despite the well-known limitations of Medicare's fee schedule. We ask to what extent this relationship reflects the use of Medicare's relative price menu as a benchmark, in order to reduce transaction costs in an otherwise complex pricing environment. We analyze 71 million claims from a large private insurer, which represent $6.3 billion in spending over three years. Using two empirical approaches, we estimate that 75 percent of services, accounting for 65 percent of dollars, are bench-marked to Medicare's relative prices. The Medicare-benchmarked share is higher for services provided by small physician groups. It is lower for capital-intensive treatment categories, for which Medicare's average-cost reimbursements deviate most from marginal cost pricing. When the insurer deviates from Medicare's relative prices, these deviations are consistent with adjusting towards the marginal costs of treatment. Our results suggest that providers and private insurers coordinate around Medicare's menu of relative payments for simplicity, but innovate when the value of doing so is likely highest.
... A large number of other studies have shown significant relationships between various Medicaid program designs, payment structures, costs, health care utilization, and health outcomes in other settings. (e.g.,J Currie, Gruber, and Fischer 1995;Duggan 2004;Duggan and Scott Morton 2006;Gruber, Kim, and Mayzlin 1999;Mullen, Frank, and Rosenthal 2009;Quast, Sappington, and Shenkman 2008) For an introduction to issues related to -prevention‖ in health care, seeKenkel (2000).3.3 The Georgia Enhanced Care ProgramThis chapter examines a specific DM program that was implemented in the state of Georgia in late 2005. ...
... Drug Re-Importation 12 Duggan and Morton (2006). 13 HHS Task Force on Drug Importation, December 2004: Report on PrescriptionDrug Importation Department of Health and Human Services, Washington D.C. ...
... While the issue of AWP inflation has received considerable attention in government reports and a series of recent lawsuits filed by CMS, it has not been explored in the academic literature. The most similar study to the present one is Duggan and Scott-Morton (2006) which examines the impact of Medicaid procurement on prices for brand name drugs. 14 However, in contrast to that paper, we focus on generic drugs. ...
Generic drugs comprise an increasing share of total prescriptions dispensed in the U.S., rising from nearly 50% in 1999 to 75% in 2009. The generic drug market has typically been viewed at the wholesale level as a competitive market with price approaching marginal costs. However, the large presence of third party payers as final purchasers may distort prices at the retail level relative to what a standard model of price competition would predict. In this paper, we investigate how generic drug producers compete in the presence of the procurement rules of the Medicaid program. Medicaid reimbursement to pharmacies, like that of other payers, is based on a benchmark price called the average wholesale price (AWP). The AWP is reported by generic producers themselves, and until recently has been subject to essentially no independent verification. As a result, generic producers have had an incentive to compete for pharmacy market share by reporting AWPs that exceed actual average wholesale prices, as this “spread” leads to larger pharmacy profits. In 2000, after a federal government audit of actual wholesale prices of generic products, states were advised to reduce Medicaid reimbursement by as much as 95% for about 400 generic and off-patent drug products. We use variation induced by the timing of this policy along with its differential impact on drug products' Medicaid reimbursement to estimate the impact of this exogenous price change on the market share of targeted products. Our findings indicate that pharmacies did respond to the perverse incentives of the Medicaid program by dispensing products with the highest AWPs. Overall, the Medicaid market share fell by about 45% for targeted drug products as a result of the policy.
... Surprisingly, the has been little empirical analysis at the intersection of these literatures, even though there are a growing number of settings where in-kind subsidies affect the decisions of private strategic firms rather than individual consumers. Our paper contributes to the nascent literature at this intersection, which includes the early work by Cutler and Reber (1998) and Gruber and Washington (2005) on tax and employer subsidies for employer-sponsored insurance plans and conceptually related work on government procurement in health care by Duggan (2004) and Duggan and Scott Morton (2006), as well as the more recent concurrent work on Medicare Advantage and the Affordable Care Act by Enthoven (2011), Frakt (2011), Curto et al. (2014), Decarolis (2015), Tebaldi (2017), Jaffe and Shepard (2018), and Polyakova and Ryan (2018). We contribute to this literature by analyzing the context of Medicare Part D, which in itself is a large market, and move the literature forward by exploring ways of incorporating nonconstant marginal costs into equilibrium pricing analysis with subsidized prices. ...
In Medicare Part D, low income individuals receive subsidies to enroll into insurance plans. This paper studies how premiums are distorted by the combined effects of this subsidy and the default assignment of low income enrollees into plans. Removing this distortion could reduce the cost of the program without worsening consumers' welfare. Using data from the the first five years of the program, an econometric model is used to estimate consumers demand for plans and to compute what premiums would be without the subsidy distortion. Preliminary estimates suggest that the reduction in premiums of affected plans would be substantial.
... Other industries listed in Table 1 are characterized by the fact that the government is usually the largest domestic buyer and where newcomers or foreign companies are in many cases excluded because of national safety or other political reasons (Stigler, 1982b). As such, government procurement can play an important role in the determination of market structure and consequently in the ability of new firms entry (Scherer and Ross, 1990; Geroski, 1991; Kovacic, 1992, Duggan and Scott-Morton, 2006 ...
... Even if all consumers are rational and search cost is minimal, US and foreign websites may sell the same drug at different prices for reasons unrelated to drug quality. To our best knowledge, US government does not regulate the listing price of brand name drugs in retail pharmacies, although Medicaid program limits Medicaid reimbursement price relative to market price (Duggan and Scott Morton 2006), and some states mandate generic substitution if a generic is available. In comparison, Canada, European countries and many developing countries, cap prices for prescription drugs and the price cap is often lower than those charged in the freer US market. ...
This study assesses the trade-off between drug safety and price savings in online drug purchases. Focusing on five brand-name prescription drugs, we acquire 370 drug samples from 41 online pharmacies and test their authenticity. Of the 41 websites, 8 are clearly US-based and verified by the National Association of Boards of Pharmacy (NABP) or LegitScript.com. We refer to them as tier 1. Another 23 websites – referred to as tier 2 – are not verified by NABP or LegitScript but verified by PharmacyChecker.com or the Canadian International Pharmacy Association (CIPA). The remaining 10 websites are not verified by any of the four verification agencies and therefore classified as tier 3. Most tier 2 and tier 3 websites are foreign.We have two main findings. First, according to our Raman spectrometry test, no failure of authenticity is found in drugs that came from verified websites, the only failures are Viagra from non-verified websites in tier 3. Second, within verified websites, tier 1 websites on average charge 52.5% more than tier 2 websites in final price (including shipping and handling) for the same drug and dosage except for Viagra. On Viagra, tier 1 and tier 2 websites show no difference in drug safety and price, but if one aims to get authentic Viagra, verified websites are both safer and cheaper than non-verified websites in tier 3. These findings confirm the FDA warning against rogue websites but suggest that a blanket warning against any foreign website may deny consumers substantial price savings from verified tier 2 websites.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
... For example, if inflation regulation reduces profit, then fewer firms will launch new products. However, running counter to this effect is the incentive to launch new products in order to establish new, higher launch prices, if demand is positively correlated across products and rising over time (Duggan and Scott Morton, 2006). Second, the theoretical analysis could be extended to consider the effect of inflation regulation on advertising. ...
New products with significant adoption costs are typically launched at low prices. Subsequent price increases are constrained by inflation regulation in markets such as pharmaceuticals, insurance, alcohol, and higher education. Previous research has shown that inflation regulation can increase launch prices and reduce both profit and efficiency, assuming consumers are myopic. This paper shows that with forward-looking consumers, inflation regulation can have the opposite effects, that is, decrease launch prices and increase profit and efficiency. Firms have an incentive to lobby for inflation regulation because it solves a reverse durable goods pricing problem.
... Our empirical work is most closely related to studies of negotiated prices in health care. Duggan and Scott Morton (2006) argue that Medicaid's drug pricing rule, which is to pay the average privately negotiated price, has the perverse effect of creating price-inelastic demand from Medicaid enrollees. This limits the bargaining power of insurance company negotiators, as excluding a drug from their formulary in response to high prices will not affect Medicaid demand . ...
Household demand for actuarially unfair insurance against small risks has long puzzled economists. One way to potentially rationalize this demand is to recognize that (non-life) insurance is an incentive-compatible means of engaging an expert buyer. To quantify the benefits of expert buying, we compare prices paid by the insured and uninsured for health care. In categories of health care where uncompensated care is more difficult to obtain (drugs, doctor office visits, and hospital outpatient visits), we find that insurers pay 10-20% less than the uninsured. For forms of care where payment by the uninsured is more likely to be negotiated after services are rendered (hospitalizations and emergency room visits) the uninsured pay about 30% less on average, due largely to the nontrivial share of uninsured who pay 5% or less of their billed charges. At least in settings where free services are difficult to obtain, expert buying is an important benefit of insurance. We discuss the implications of the delegated-purchasing view of insurance for con-sumer-driven health insurance and for self-insurance by employers.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
... Mark Duggan of the University of Maryland and Fiona Scott Morton of Yale University find that this effectively increases the price of non-Medicaid prescriptions by 13.3 percent over and above what they otherwise would be. 51 Thus, if a regime of medications costs a private payer $1,000 per year, over $117 of that cost is effectively a hidden tax attributable to Medicaid. ...
Medicaid occupies a special place among government programs for the poor. Public support for Medicaid is broader and deeper than for other safety net programs because the consequences of inadequate medical care can be much more immediate and severe than those of a lack of money or even food. Medicaid is now larger than Medicare (the federal health program for the elderly and disabled) and is the single largest item in state budgets, even larger than elementary and secondary education. Yet Medicaid imposes additional hidden costs. Like all means-tested government programs, Medicaid discourages work and charitable effort among the taxpayers who fund it, while discouraging self-sufficiency and encouraging dependence among beneficiaries. Medicaid also imposes costs that stem from overuse of medical care, increasing costs for private payers, and giving patients poorer quality care than they could obtain with private coverage. As it did with federal cash assistance, Congress should: (1) cap federal Medicaid spending, (2) block grant federal funds to the states, and (3) allow states full flexibility to define eligibility and benefits under their Medicaid programs. States should use that flexibility to target Medicaid assistance to the truly needy, reduce dependence, reduce crowd-out of private effort, and promote competitive private markets for medical care and insurance. That means withdrawing assistance from those who are most able to obtain coverage elsewhere and deregulating health care and health insurance markets so they can meet that need.
Many prices in healthcare markets are determined by business-to-business negotiations among healthcare providers, producers, and payers. Combined with the rich data that has become available to healthcare researchers, this has led to a growing body of empirical research on bargaining in healthcare markets, particularly in the development of structural models of bargaining that researchers can estimate from data and use to consider counterfactual policies. In this chapter, we review these models and their importance for healthcare and bargaining research more broadly.
Using pharmacy claims from New Hampshire between 2009 and 2011, I study the extent to which pharmacy competition affects prescription payments. I measure pharmacy competition by the distance to nearby rivals, as well as a fixed-travel-time HHI (Dunn and Shapiro, 2014). After controlling for various factors, including insurer, pharmacy, drug, and area characteristics, I find higher average drug prices in more concentrated seller (pharmacy) markets, but lower prices in more concentrated buyer (insurer) markets. Ceteris paribus, pharmacies with high market power (concentration in the 90th percentile) charge 2.78% more than those with low market power (concentration in the 10th percentile). The distance effect is more pronounced if a nearby pharmacy belongs to the same national chain. In addition, I show heterogeneous distance effects across different drug types and areas. My analysis contributes to the empirical literature on competition measures by adding new evidence from the retail pharmaceutical market.
The extent to which premium subsidies can influence health insurance choices is an open question. In this paper, we explore the regional variation in subsidy schemes in Switzerland, designed as either in-kind or cash transfers, to study their impact on the choice of health insurance deductibles. Using health survey data and a difference-in-differences methodology, we find that in-kind transfers increase the likelihood of choosing a low deductible plan by approximately 4 percentage points (or 7%). Our results indicate that the response to in-kind transfers is strongest among women, middle-aged and unmarried individuals, which we explain by differences in risk-taking behavior, health status, financial constraints, health insurance and financial literacy. We discuss our results in the light of potential extra-marginal effects on the demand for health care services, which are however not supported by our data.
One of private health insurers’ main roles in the United States is to negotiate physician payment rates on their beneficiaries’ behalf. We show that these rates are often set in reference to a government benchmark, and ask how often private insurers customize their fee schedules away from this default. We exploit changes in Medicare's payments and dramatic bunching in markups over Medicare's rates to address this question. Although Medicare's rates are influential, 25 percent of physician services in our data, representing 45 percent of covered spending, deviate from the benchmark. Heterogeneity in the pervasiveness and direction of deviations suggests that the private market coordinates around Medicare's pricing for simplicity but abandons it when sufficient value is at stake.
Background:
Prescription drug spending is a significant component of Medicaid total expenditures. The Affordable Care Act (ACA) includes a provision that increases the Medicaid rebate for both brand-name and generic drugs. This study examines the extent to which oncology drug prices changed after the increase in the Medicaid rebate in 2010.
Methods:
A pre-post study design was used to evaluate the correlation between the Medicaid rebate increase and oncology drug prices after 2010 using 2006-2013 State Drug Utilization Data.
Results:
The results show that the average annual price of top-selling cancer drugs in 2006, adjusted for inflation and secular changes in drug prices, have increased by US$154 and US$235 for branded and competitive brand drugs, respectively, following the 2010 ACA; however, generic oncology drug prices showed no significant changes.
Conclusions:
The findings from this study indicate that oncology drug prices have increased after the 2010 ACA, and suggest that pharmaceutical companies may have increased their drug prices to offset increases in Medicaid rebates.
U.S. federal and state governments rarely regulate healthcare price levels, but do regulate price changes for pharmaceuticals, hospitals, and health insurance. Previous research showed that limiting price increases can raise launch prices and reduce both profit and social welfare, assuming consumers are myopic. We show that with forward-looking consumers, limiting price increases can have the opposite effect, that is, launch prices fall while profit and social welfare rise. Ironically, inflation regulation can cause inflation to rise, but only because firms are reducing launch prices to make the regulation bind and credibly commit to future prices.
The creation of new vaccines is one of the key challenges in the battle against global infectious diseases. Therefore, creating the optimal conditions for innovation in vaccines is one of the most important roles law may undertake in this battle. In relation to pharmaceuticals, the economic theory of patent protection is commonly cited by industry and in the academic literature to justify the patenting of life-saving medicines and vaccines. The economic theory of patent protection holds that innovation occurs due to patents protecting the research and development investment made by the innovator. Proponents of this theory claim that without patents such innovation in medicines and vaccines would occur at a significantly reduced rate. This Article considers the applicability of the economic theory of patent protection to pandemic influenza vaccines. This Article examines a number of factors relevant to patent law, theory, and innovation including: the patent landscape for pandemic influenza vaccines; the market dominance enjoyed by manufacturers; the actual risk posed by imitators making generic vaccines if patent protection were not in place; and, the licensing and regulatory provisions for creating generic vaccines.
Health insurance in the United States continues to be a complex mix of private and public programs. The advent of health-care reform legislation, the Patient Protection and Accountable Care Act (PPACA), portends significant new challenges and research opportunities. This chapter provides a historical overview of the US system and a summary of the key features of the PPACA that affect health insurance. Attention is then directed to the key issues in health insurance and an update on the research undertaken in the last decade. Key topics include adverse selection and moral hazard where the new research examines multidimensional selection, forward-looking behavior, prescription drug coverage, and utilization management as a mechanism to control moral hazard. Managed care continues to be the dominate form of private coverage and the research on its comparative advantage in selective contracting is reviewed along with the evidence on managed care backlash and the efforts at provider consolidation. New research is beginning to examine the market structure, conduct, and performance of the health insurance sector and this is reviewed. Much of the chapter is devoted to new research on important aspects of employer-sponsored health insurance. This includes premium sensitivity, compensating wage differentials, and the tax treatment of employer-sponsored coverage. Significant new research has also examined the role of the employer as agent for his/her workers. Individual, non-group markets have historically played a minor role in the USA. Knowledge of these markets is reviewed as is the immerging market in high-deductible health plans. Early research on state insurance regulation typically found only small effects. More recent research has tended to examine the effects of specific laws and to explore the effects among high- and low-risk individuals and firms. Finally, there has been substantial new research focusing in the Medicare program for older residents. This work examines the effects of risk adjustment in the Medicare Advantage program and the effects in the Medicare prescription drug program. Throughout the chapter attention is given to future avenues of research that are likely to emerge from the PPACA legislation.
We test whether the generosity of employer-sponsored health insurance facilitates the exercise of market power by hospitals. We construct indices of health plan generosity and the price and volume of hospital services using data from Truven MarketScan for 601 counties from 2001 to 2007. We use variation in the industry and union status of covered workers within a county over time to identify the causal effects of generosity. Although OLS estimates fail to reject the hypothesis that generosity facilitates the exercise of hospital market power, IV estimates show a statistically significant and economically important positive effect of plan generosity on hospital prices in uncompetitive markets, but not in competitive markets. Our results suggest that most of the aggregate effect of hospital market structure on prices found in previous work may be coming from areas with generous plans.
This paper shows how in Medicare Part D insurers' gaming of the subsidy paid to low-income enrollees distorts premiums and raises the program cost. Using plan-level data from the first five years of the program, I find multiple instances of pricing strategy distortions for the largest insurers. Instrumental variable estimates indicate that the changes in a concentration index measuring the manipulability of the subsidy can explain a large share of the premium growth observed between 2006 and 2011. Removing this distortion could reduce the cost of the program without worsening consumer welfare.
Medicare Part D is the voluntary program that provides insurance for prescription drugs to 37 million US elderly. This form of public insurance is delivered exclusively through a choice-based private insurance market, where Medicare pays various types of subsidies. The objective of this paper is to analyze how the subsidy paid to low income enrollees induces insurers to distort their plan premiums.
Combining both an analysis of the incentives created by the different regulations and empirical evidence obtained from plan level data for the years between 2006 and 2013, the paper evaluates the presence of premium distortions associated with insurers response to the low income subsidy.
The findings indicate that insurers cluster premiums at the value that maximizes the rents they earn on enrollees receiving the low income subsidies. Moreover, insurers use the possibility of offering multiple insurance plans to manipulate the amount of the subsidy and increase further their rents.
This study indicates the need to reform the subsidy system in Medicare Part D and offers guidance on the essential elements of the low income subsidy reform.
Copyright © 2015 Elsevier Ireland Ltd. All rights reserved.
Pharmaceutical Economics encompasses the economics of the pharmaceutical industry but it is far more than that. Because pharmaceuticals have an important impact on public health, government actions are necessarily involved, which have a major effect on market outcomes. An important example is that the US generic pharmaceutical industry was largely created by 1984 legislation. The interaction of private incentives and government regulations has together determined pharmaceutical products, prices and quantities in both the branded and generic industries. In this paper, we review the extensive literature on these subjects from which one can draw conclusions regarding the performance of this important sector of the economy .
This chapter describes the market for pharmaceuticals, which exceeded $500 million in sales in 2010. The industry is also characterized by extensive regulation of almost every activity, from product development through manufacturing and marketing, which we summarize. We next describe the industry's market structure. Large, fully integrated, multinational firms that develop and market new drugs have historically dominated the industry, but the emergence of smaller firms focused on the application of biotechnology to drug development as well as firms that specialize in low-cost production of off-patent "generic" drugs has had an important impact on the market structure of the industry. The last two decades have seen a shift towards vertical specialization as well as many horizontal mergers. We discuss trends in the productivity of pharmaceutical research and incentives for innovation. We then summarize the pricing and marketing of drugs in the US and several other countries.
The cost of drugs is a major and rapidly rising component of health-care expenditures. We survey recent literature on the ethics and economics of skyrocketing pharmaceutical prices and find that advances in economic research have increased the sharpness and focus of the ethically based calls to increase access by modifying patent protection and reducing prices. In some cases, research supports ethical arguments for broader access. Other research suggests that efforts to broaden access result in unintended consequences for innovation and the medical needs of patients. Both ethicists and economists need to be more cognizant of the real clinical settings in which physicians practice medicine with real patients. Greater cross-disciplinary interaction among economists, ethicists, and physicians can help reduce the disjunction between innovation and access and improve access and patient care. This dialogue will impact private industry and may spur new multistakeholder paradigms for drug discovery, development, and pricing. Expected final online publication date for the Annual Review of Pharmacology and Toxicology Volume 55 is January 06, 2015. Please see http://www.annualreviews.org/catalog/pubdates.aspx for revised estimates.
The lack of research on how the 2004 safety-related withdrawal of the drug Vioxx affected consumer drug utilization or outcomes for competitors is a missed opportunity to learn from the largest drug withdrawal event in history. Our study fills this void using state-level repeated cross section data from the Medicaid State Drug Utilization (SDU) database of fee-for-service Medicaid claims for prescription drugs, and individual-level panel data from the Medical Expenditure Panel Survey (MEPS) which is a nationally representative survey that contains information on medication use across two years. We find that the withdrawal of Vioxx had both positive and negative effects for specific substitute drugs in its own class (COX-2s), and that it led to an overall increase in the usage of both its most direct competitor class (NSAIDs) and in a class of older similar therapy (Analgesics). We argue these shifts in drug usage represent what could be viewed as an appropriate response to the events. However, aggregate use of drugs in the COX-2 and related classes declined overall, suggesting that some consumers may have over-reacted to the withdrawal events in ways that lessened the health benefits they could receive from this family of drugs. These findings about medication utilization changes in response to negative information are highly relevant for policy design and for determining thresholds for regulatory interventions.
This article uses an audit sample and a consumer survey to study the intriguing market of online prescription drugs facing US customers and assesses the role that certification agencies play in online drug markets.
On the supply side, we acquire samples of five popular brand-name prescription drugs from three types of online pharmacies: tier 1 are US-based and certified by the National Association of Boards of Pharmacy (NABP) or LegitScript.com, tier 2 are certified by PharmacyChecker.com or the Canadian International Pharmacy Association but not by NABP or LegitScript, and tier 3 are not certified by any of the four agencies. Most tier-2 and tier-3 websites are foreign. We find that 37 of the 365 delivered samples are different from the products we ordered and, therefore, non-testable. Conditional on testable samples, Raman spectrometry test finds no failure of authenticity except for eight Viagra samples from tier-3 websites. After controlling for testability and authenticity, tier-2 websites are 49.2% cheaper ( p <0.01) and tier-3 websites are 54.8% cheaper ( p < 0.01) than tier-1 sites. These differences are driven by non-Viagra drugs. For Viagra, failing samples are cheaper, but there is no significant price difference across tiers once we condition on testability and authenticity.
To study the demand side, we designed a survey that was distributed by RxRights. Among the 2,522 respondents who have purchased prescription medication and are concerned about the price of US pharmaceuticals, results show that 61.54% purchase drugs online and mostly from foreign websites, citing cost saving as the leading reason. Conditional on shopping online, 41.11% check with a credentialing agency.
Both samples convey a consistent message that certification agencies deliver useful information for foreign websites and online consumers. Further, while these findings confirm the Food and Drug Administration warning against rogue websites, they do suggest that a blanket ban against all foreign websites may deny consumers substantial savings from certified tier-2 websites.
The enforcement of stringent intellectual property rights in the pharmaceutical sector of developing countries generates considerable controversy, due to both the extensive research investment and the public policy importance of this sector. This paper explores the likely effects of enforcing product patents on prices and utilization of drugs in the Central Nervous System market in India. The Central Nervous System segment is the second largest therapeutic category in terms of retail sales in the world and is one of the fastest growing segments in India. Using information on product patents granted by the government and panel data on pharmaceutical prices and utilization from 2003-2008, the paper finds limited evidence of overall price increase following the introduction of product patents. However, there appear to be heterogeneous effects on prices by the type of product patent granted on drugs, implying the need for a careful examination of the product patent portfolio.
The International Conference on International Business (ICIB) aims to bring together
academics and practitioners in order to share ideas and methods for the exploration of
foreign direct investment (FDI), the role of multinational corporations (MNCs) and the
complexity of the globalized business environment.
ICIB 2010 took place on 22-23 May 2010 and was organized in parallel sessions of
English and Greek.
This paper studies price determination in pharmaceutical markets using data for 25 countries, 6 years, and a comprehensive list of products from the MIDAS IMS database. A key finding is that the USA has prices that are not significantly higher than those of countries with similar income levels, especially those that are 'lightly regulated'. More importantly, price differences to the US levels increase for 'branded', world top selling, or innovative products, and decrease, regardless of the level of regulation for mature or widely diffused molecules. Because prices for top selling molecules may be easier to perceive and recollect and more important for companies, they may bias the public discussion about international price differences. Copyright © 2013 John Wiley & Sons, Ltd.
Increased health care spending has placed pressure on public and private payers to prioritize spending. Cost-effectiveness (CE) analysis is the main tool used by payers to prioritize coverage of new therapies. We argue that reimbursement based on CE is subject to a form of the "Lucas critique"; the goals of CE policies may not materialize when firms affected by the policies respond optimally to them. For instance, because 'costs' in CE analysis reflect prices set optimally by firms rather than production costs, observed CE levels will depend on how firm pricing responds to CE policies. Observed CE is therefore endogenous. When CE is endogenously determined, policies aimed at lowering spending and improving overall CE may paradoxically raise spending and lead to the adoption of more resource-costly treatments. We empirically illustrate whether this may occur using data on public coverage decisions in the United Kingdom.
We often think of international aid as a function directly performed by government; however, the bulk of aid is contracted out by government to private nonpro…t and for-pro…t enterprises typically on a competitive basis. What role does a tenderer's organizational form play in shap-ing contracting relations with government? I shed light on this question using archival data from the UK's Department for International Development. Guided by three sets of predictions from a simple model of competitive bidding for incomplete aid contracts with nonpro…t and for-pro…t contestants, I …nd that (1) nonpro…ts tend to compete for aid projects where there exists high returns to non-contractible quality innovations, government …nds strict adherence to the initial "Terms of Reference" (TOR) relatively less important and/or nonpro…ts reap substantial intrinsic gains from project realization; (2) the initial o¤ers made by nonpro…ts on average adhere less to the project's TOR than the initial bids submitted by for-pro…ts; and (3) government's ex post transaction costs when contracting with a for-pro…t are on average substantially higher than when contracting with a nonpro…t. These results suggest that organi-zational form has implications well beyond patterns of specialization. The paper thus provides a novel, useful framework for understanding the true costs and bene…ts of government procuring aid services, or public services more generally, from nonpro…ts and for-pro…ts., and numerous seminar participants at CMPO Bristol, STICERD (LSE), EOPP (LSE), Durham Business School, Harvard Business School, University of Namur, Univer-sity of Oxford, SITE at the Stockholm School of Economics, European seminar on "Civil Society & Governance" organized by Öhrlings PriceWaterhouseCoopers and Stockholm School of Economics, UK's Department for Interna-tional Development at its London Headquarters and the Belgian Technical Cooperation in Brussels provided valuable advice and helpful comments. I am grateful to Adrian Wood and DFID's Procurement Team in East Kilbride, who patiently answered my many questions and assisted with the data collection e¤orts; to Shawnee Keck and Christian Mor…n for their excellent research assistance; and the Department of Economics and the MPA Programme at the LSE for funding the data collection.
Many important issues in business-to-business markets involve price discrimination and negotiated prices, situations where theoretical predictions are ambiguous. This paper uses new panel data on buyer-supplier transfers and a structural model to empirically analyze bargaining and price discrimination in a medical device market. While many phenomena that restrict different prices to different buyers are suggested as ways to decrease hospital costs (e.g., mergers, group purchasing organizations, and transparency), I find that: (1) more uniform pricing works against hospitals by softening competition; and (2) results depend ultimately on a previously unexplored bargaining effect.
A controversial feature of Medicare Part D is its reliance on private insurers to negotiate drug prices and rebates with retail pharmacies and drug manufacturers. Central to this controversy is whether increases in market power—an undesirable feature in most settings—confer benefits in health insurance markets, where larger buyers may obtain better prices for their members. We test whether insurers that experience larger enrollment increases due to Part D negotiate lower drug prices with pharmacies. Overall, we find that 100,000 additional insureds lead to 2.5-percent lower pharmacy prices negotiated by the insurer, and 5-percent reductions in pharmacy profits earned on prescriptions filled by enrollees of that insurer. Estimated enrollment effects are much larger for drugs with therapeutic substitutes, and virtually zero for branded drugs without therapeutic substitutes. We also present evidence that most insurer savings are, on the margin, passed on as lower premiums. Out-of-sample estimation suggests that modest insurer consolidation would generate significant savings to Medicare, along with premium reductions and enrollment increases. Finally, we find that greater enrollment leads to lower pharmacy prices negotiated by insurers for their non-Part D market—an external benefit to the commercially enrolled associated with administering Part D through private insurers.
This foreword to a special issue of e-competitions explores the EU competition law implications of public procurement activities. More specifically, it tries to highlight how bid rigging seems pervasive in the public procurement setting despite increased enforcement efforts (a situation that should come as no surprise to economists) (Part I), how there are very significant limitations and almost absolute difficulties in curving the market behavior of power public buyers (Part II) and how other issues, such as the treatment of mergers or State aid in public procurement markets may require more refined analyses than those applied so far (Part III). References to EU and national case law are used to color the depiction of the current situation in the enforcement of EU competition law in the public procurement setting, but the selection of cases or jurisdictions considered does not attempt to be exhaustive.
Responsible behaviour becomes a must in the everyday business owing to the huge pressures from different stakeholders. Products and their quality are no longer considered main competitors but companies, their brands and reputation are. The purpose of the paper is to offer an explanation how Corporate Social Responsibility (CSR) influences corporation's reputation. An empirical analysis in the Republic of Croatia was conducted. The aim was to enlighten the current state of CSR as one of the aspects of corporate governance in building corporate reputation. Managers' perception regarding the importance of CSR in building better reputation and competitive advantage was highlighted.
To assess the impact of Medicaid expan- sion for pregnant women in South Carolina and California, the authors compared change in rates of timely prenatal care, adverse infant and maternal health out- comes, and use of cesarean section for groups of pregnant women who were either uninsured or covered by Medicaid, versus women with private coverage. The results showed small and/or inconsistent changes. Provision of coverage may be the first logi- cal step in improving health care for the uninsured, but outcomes may rely more on outreach, coordination of care, and non- medical interventions than on provision of insurance coverage per se.
Empirical studies suggest that entry of generic competitors results in minimal decreases or even increases in brand-name drug prices as well as sharp declines in brand-name advertising. This paper examines circumstances under which this empirical pattern could be observed. The analysis focuses on models where the demand for brand-name pharmaceuticals is divided into two segments, only one of which is cross-price-sensitive. Brand-name firms are assumed to set price and advertising in a Stackelberg context; they allow for responses by generic producers but the latter take decisions by brand-name f inns as given. Brand-name price and advertising responses to entry are shown to depend upon the properties of the reduced-form brand-name demand function. Conditions for positive price responses and negative advertising responses are derived. We also examine the implications for brand-name price levels, and for the brand-name price response to entry, of health sector trends (such as increasing HMO enrollments) that may have the effect of expanding the size of the cross-price-sensitive segment of the market. The paper concludes with a review of recent empirical research and suggestions for future work on the effects of generic entry.
This chapter reviews the structure of the Medicaid program and its economic impact. Section 1.1 begins by reviewing the program's history, and discussing the evolution and current structure of program rules. Section 1.2 then turns to a more detailed discussion of the program as it currently exists, presenting a variety of statistics on enrollment and expenditures. Section 1.3 provides a heuristic overview of the economic impacts of the Medicaid program, and Section 1.4 reviews the large empirical literature on the Medicaid program and its impacts on health care utilization, health, labor supply, family structure, and other behaviors. Section 1.5 discusses current policy issues and how they are informed (or not informed) by the existing literature, and Section 1.6 concludes.
This paper is concerned with the performance of the former British Airports Authority (BAA) before and after privatisation, and more specifically with its technical efficiency. BAA was privatised under the Airports Act 1986, in July 1987. The paper considers to what extent technical efficiency changed following privatisation using data envelopment analysis. The study finds that privatisation had no noticeable impact on technical efficiency, and that technical efficiency within BAA is a composite of varying performance across the different airports operated by the company over time.
Objective: This work carries out an empirical evaluation of the impact of the main mechanism for regulating the prices of medicines in the UK [the Pharmaceutical Price Regulation Scheme (PPRS)] on a variety of pharmaceutical price indices. The article also discusses to what extent the rate-of-return (ROR) regulation has encouraged UK-based pharmaceutical firms with patented products to diversify into markets in which products face strong competition.
Design and setting: The article starts with some background on the PPRS and the way firms behave under ROR constraints. The article goes on to explain the cointegration methods used and the results obtained. Finally, it offers some discussion and some conclusions related to the evidence and the incentives of UK pharmaceutical firms under the PPRS constraint.
Main outcome measures and results: The results obtained show that, according to only some cointegration tests carried out, the aggregate price indices of medical preparations and the price index of some therapeutic areas are cointegrated with the time series of ROR caps between 1980 and 1994. Additionally, a 1% change in the ROR cap has produced only a 0.15% change on the aggregate medicine price index.
Conclusions: These results suggest that changes in the ROR cap have had little or no impact on medicine prices and that, at best, the impact of the ROR has also differed significantly across major therapeutic areas. Finally, it is argues that the UK regulation of prices might have encouraged firms to diversify into competitive medicine-regulated markets and into uncontrolled markets.
The Theory of Industrial Organization is the first primary text to treat the new industrial organization at the advanced-undergraduate and graduate level. Rigorously analytical and filled with exercises coded to indicate level of difficulty, it provides a unified and modern treatment of the field with accessible models that are simplified to highlight robust economic ideas while working at an intuitive level. To aid students at different levels, each chapter is divided into a main text and supplementary section containing more advanced material. Each chapter opens with elementary models and builds on this base to incorporate current research in a coherent synthesis. Tirole begins with a background discussion of the theory of the firm. In part I he develops the modern theory of monopoly, addressing single product and multi product pricing, static and intertemporal price discrimination, quality choice, reputation, and vertical restraints. In part II, Tirole takes up strategic interaction between firms, starting with a novel treatment of the Bertrand-Cournot interdependent pricing problem. He studies how capacity constraints, repeated interaction, product positioning, advertising, and asymmetric information affect competition or tacit collusion. He then develops topics having to do with long term competition, including barriers to entry, contestability, exit, and research and development. He concludes with a "game theory user's manual" and a section of review exercises.
Recent theoretical work suggests that means and asset-tested social insurance programs can explain the low savings of lower income households in the U.S. We assess the validity of this hypothesis by investigating the effect of Medicaid, the health insurance program for low-income women and children, on savings behavior. We do so using data on asset holdings from the Survey of Income and Program Participation, and on consumption from the Consumer Expenditure Survey, matched to information on the eligibility of each household for Medicaid. Exogenous variation in Medicaid eligibility is provided by the dramatic expansion of this program over the 1984-1993 period. We document that Medicaid eligibility has a sizeable and significant negative effect on wealth holdings; we estimate that in 1993 the Medicaid program lowered wealth holdings by 17.7% among the eligible population. We confirm this finding by showing a strong positive association between Medicaid eligibility and consumption expenditures; in 1993, the program raised consumption expenditures among eligibles by 5.2%. We also exploit the fact that asset testing was phased out by the Medicaid program over this period to document that these Medicaid effects are much stronger in the presence of an asset test, confirming the importance of asset testing for household savings decisions.
Public policies designed to increase utilization of existing technologies may also affect incentives to develop new technologies. This paper investigates this phenomenon by examining policies designed to increase usage of preexisting vaccines. I find that these policies were associated with a 2.5-fold increase in clinical trials for new vaccines. For several diseases, the induced innovation is socially wasteful, though small in magnitude. In one case, however, the "dynamic" social welfare b enefits from induced innovation exceed the policies' "static" benefits from increasing vaccination with existing technology. These findings underscore the importance of including technological progress in economic analysis of public policy. © 2004 MIT Press
The cost of expanding public-sector health programs depends critically on the extent to which public eligibility will cover just the uninsured or will crowd out existing private insurance coverage. The authors estimate the extent of crowd-out arising from the expansions of Medicaid to pregnant women and children over the 1987-1992 period. They estimate that approximately 50 percent of the increase in Medicaid coverage was associated with a reduction in private insurance coverage. This occurred largely because employees took up employer-based insurance less frequently. There is also some evidence that employers contributed less for insurance and that workers dropped coverage of dependents. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
The author assesses the impact of losing public health insurance on labor market decisions of women by examining a series of Medicaid eligibility expansions targeted toward young children. These targeted expansions severed the historical tie between AFDC and Medicaid eligibility. The reforms allowed a mother's earnings to increase without losing public health insurance for her young children. Increasing the income limit for Medicaid resulted in a decrease in AFDC participation and an increase in labor force participation among these women. The effects were large for ever married women and negligible for never married women. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This work carries out an empirical evaluation of the impact of the main mechanism for regulating the prices of medicines in the UK [the Pharmaceutical Price Regulation Scheme (PPRS)] on a variety of pharmaceutical price indices. The article also discusses to what extent the rate-of-return (ROR) regulation has encouraged UK-based pharmaceutical firms with patented products to diversify into markets in which products face strong competition.
The article starts with some background on the PPRS and the way firms behave under ROR constraints. The article goes on to explain the cointegration methods used and the results obtained. Finally, it offers some discussion and some conclusions related to the evidence and the incentives of UK pharmaceutical firms under the PPRS constraint.
The results obtained show that, according to only some cointegration tests carried out, the aggregate price indices of medical preparations and the price index of some therapeutic areas are cointegrated with the time series of ROR caps between 1980 and 1994. Additionally, a 1% change in the ROR cap has produced only a 0.15% change on the aggregate medicine price index.
These results suggest that changes in the ROR cap have had little or no impact on medicine prices and that, at best, the impact of the ROR has also differed significantly across major therapeutic areas. Finally, it is argues that the UK regulation of prices might have encouraged firms to diversify into competitive medicine-regulated markets and into uncontrolled markets.
The number of participants in the SSI program grew by 1.1 million from 1987 to 1993. This paper examines the role of Medicaid on the SSI participation decision. I use the rapid growth in average Medicaid expenditure as a proxy for its value. OLS estimates of Medicaid's effect may be biased because of omitted variables bias and measurement error. I therefore apply two-stage least squares to estimate Medicaid's effect, using average Medicaid expenditure for blind SSI recipients as an instrument. These estimates show that rising Medicaid expenditure significantly increased SSI participation among adults with low permanent incomes, explaining 20% of the growth.
Analysis of the 1979 to 1993 surveys of national claims data shows that, using deflated prices, most of the increase in outpatient care costs is due to drugs, with increases in gross volume and deflated unit prices making equal contributions. Further analysis of detailed prescriptions data obtained from one-tenth of the total sample for 1991 and 1993 reveals that new drugs and originator drugs tend to be selected more often. The present vicious cycle of high launch prices, followed by subsequent cuts in the fee schedule, has led to adverse consequences for the industry, physicians and patients.
In 1991 a most-favored customer (MFC) rule was adopted to govern pharmaceutical prices paid by Medicaid. Theoretical models show that an MFC rule commits a firm to compete less aggressively in prices. I find that the price of branded products facing generic competition rose (4% on average). Brands protected by patents did not significantly increase in price. Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC; I find that generic firms raise price more as their markets become concentrated. Hospital prices show little change. The results suggest that the MFC rule caused higher prices for some pharmaceutical customers.
Most states have adopted administrative measures to encourage the use of prenatal care among medicaid-eligible women. At the same time, declining welfare caseloads have caused many women to lose medicaid. We examine the effects of changes in income eligibility, administrative procedures, and welfare caseloads using data from all birth certificates for 1990-1996. Higher income cutoffs increased use of prenatal care, while decreases in welfare caseloads reduced it. Changes in income cutoffs also reduced fetal deaths. These results suggest that the administrative reforms have not broken the close link between welfare participation and access to medicaid.
This paper defines the average wholesale price (AWP), which has become an important benchmark for prescription drug pricing and reimbursement.The paper briefly explains the AWP's various uses in the pricing of prescription drugs, highlights some of the problems that have emerged as a result of the way it is reported and used, and explores some of the possibilities for reform. The paper also contains a glossary of commonly used terms, as well as an appendix that lists the state Medicaid reimbursement formulas.
Discussions of the Medicare drug benefit have focused more on what beneficiaries will pay than what pharmaceutical manufacturers will receive. A key choice is the degree to which Medicare must become involved in setting manufacturers' prices. If prices must be set, Medicare could do so using average wholesale price, comparison with prices in other markets, cost, or rate-of-return regulation. Because all four methods have substantial drawbacks, Medicare should not initially attempt to set prices, but to prevent abuses in pricing, Congress should allow cost to be considered in coverage decisions.
During the last several years, spending on prescription drugs in the U.S. increased at a 15% annual rate, with the US 178 billion dollars spent in 2002 accounting for more than 11% of health care expenditures in the U.S. This growth has been largely driven by a shift to new drugs, which are typically more expensive than earlier drugs within the same therapeutic category. Recent research has suggested that the shift to new drugs may lower health care spending by reducing the demand for hospitalizations and other health care services. Using a 20% sample of Medicaid recipients from the state of California for the 1993-2001 period, I investigate this hypothesis for antipsychotic drugs--the therapeutic category that has accounted for more government spending than any other during the past decade. Using three different identification strategies, my findings demonstrate that the 610% increase in Medicaid spending on antipsychotic drugs during the study period caused by the shift to three new treatments has not reduced spending on other types of medical care, thus undermining the hypothesis that the drugs have "paid for themselves." Because of data limitations, the findings for health outcomes are necessarily more speculative but suggest that the new medications have increased the prevalence of diabetes while reducing the prevalence of extrapyramidal symptoms among the mentally ill.
This article develops a framework to understand the factors to which regulatory agencies respond and examines how these factors may influence agency decision-making. The model shows how either changing feedback from constituents or changing regulatory costs can alter the trade-offs facing the agency and hence create opportunities for substitution among different agency actions. This framework is used to explain the changing portfolio of FDA enforcement actions between 1972-92. Results indicate that changing constituent and political feedback is the reason for the observed policy change. Specifically, budget reductions and increasing industry demand for product approval led the FDA to reduce monitoring and substitute less resource-intensive enforcement, namely recalls, for more resource-intensive enforcement. Results also show that increasing numbers of adverse drug reaction reports from consumers and physicians enabled the agency to increase the efficiency of its inspections policy and to ultimately reduce its use of inspections. Copyright 1996 by Oxford University Press.
During the 1980s the share of prescriptions sold by retail pharmacies that was accounted for by generic products roughly doubled. The price response to generic entry of brand-name products has been a source of controversy. In this paper we estimate models of price responses to generic entry in the market for brand-name and generic drugs. We study a sample of 32 drugs that lost patent protection during the early to mid-1980s. Our results provide evidence that brand-name prices increase after generic entry and are accompanied by large decreases in the price of generic drugs. Copyright (c) 1997 Massachusetts Institute of Technology.
Drug-Price Surge May Erode Savings from Medicare Card
- Barbara Martinez
Martinez, Barbara (2004) " Drug-Price Surge May Erode Savings from Medicare Card " Wall
Street Journal March 24, 2004 page B1.
Medicaid Outpatient Prescription Drug Benefits: Findings from a National Survey and Selected Case Study Highlights
Kaiser Commission on Medicaid and the Uninsured (2001) " Medicaid Outpatient Prescription
Drug Benefits: Findings from a National Survey and Selected Case Study Highlights. "
Medicaid " in Means-Tested Transfer Programs in the United States
- Jonathan Gruber
Gruber, Jonathan (2003) " Medicaid " in Means-Tested Transfer Programs in the United States.
Edited by Robert Moffitt, NBER, Cambridge.
Prescription Drug Expenditures in 2001: Another Year of Escalating Costs
National Institute for Health Care Management (2002) " Prescription Drug Expenditures in 2001:
Another Year of Escalating Costs. "
AIDS Drug Assistance Programs – Getting the Best Price? Issue Brief National ADAP Monitoring Project
- Chris Aldridge
- Arnold Doyle
Aldridge, Chris and Arnold Doyle (2002) " AIDS Drug Assistance Programs – Getting the Best
Price? Issue Brief National ADAP Monitoring Project, April 2002.
AIDS Drug Assistance Programs- Getting the Best Price?" mimeo, National AIDS Drug Assistance Program Monitoring Project
- Christopher Aldridge
- Arnold Doyle