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Journal Article

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

Fiona Scott Morton
The RAND Journal of Economics
Vol. 28, No. 2 (Summer, 1997), pp. 269-290
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555805
Page Count: 22
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The Strategic Response by Pharmaceutical Firms to the Medicaid Most- Favored-Customer Rules
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Abstract

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 consumers.

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