Do Medicaid discounts increase prices?

A number of people talk about Medicaid “best price”…but what is it really?  StatNews provides a concise overview:

The Medicaid best price law, enacted in 1990, requires drug manufacturers to charge the Medicaid program the lowest or “best” price they negotiate with any other buyer and send a rebate check to every state Medicaid department so they receive that same price. It sounds good on paper. After all, Medicaid serves the worthy purpose of providing health coverage to the poorest among us, and is paid for with scarce taxpayer dollars.

While in partial equilibrium, Medicaid rebates may serve to lower the cost that Medicaid pays, in a general equilibrium setting, that is not entirely clear.  Specifically, Medicaid rebates may lead to pharmaceutical prices to increase sticker prices.  If the target price is $X for Medicaid, and the mandated discount is 20%, then pharmaceutical firms may set prices at $X*(1.2).  If mandated discounts are 30%, then perhaps the retail price would be $X*1.3.  This is a simple example and ignores market dynamics, market power, and the ability of pharmaceutical firms to act as price takers rather than price makers.

However, empirical evidence tends to support the point that increased Medicaid rebates increases sticker prices.  A paper by Duggan and Morton (2006) uses data on the 200 top selling drugs between 1997 and 2002 and examine the relationship between Medicaid market share and the average prescription price.  They find the following:

 …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.

Clearly, increase Medicaid rebates lower the cost of drugs for the Medicaid program in the short-run but these rebate requirements may cause drug prices to rise for non-Medicaid patients.

Source:

• Duggan M, Scott Morton FM. The distortionary effects of government procurement: evidence from Medicaid prescription drug purchasing. The Quarterly Journal of Economics. 2006 Feb 1;121(1):1-30.

 

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