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

Abstract

America very generously provided the data for this project. I am grateful for financial support from the In 1991 a Most Favored Customer (MFC) was adopted to govern pharmaceutical prices paid by Medicaid. Theoretical models show an MFC rule commits a firm to compete less aggressively in prices. I find the price of branded products facing generic competition rose (4 % on average). Brands protected by patents did not significantly increase 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 the MFC rule caused higher The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) included a rebate program that featured a Most-Favored-Customer (MFC) clause for Medicaid reimbursement: Medicaid would pay manufacturers the lowest price offered to any buyer of the product. The rules also provided for