Josh Feng - ACA Medicaid

Profiting From Most-Favored Customer Procurement Rules: Evidence from Medicaid

How do "best-price" procurement rules affect commercial markets?

"Best price" or most-favored customer clauses (MFCC) are prevalent in government procurement rules. The General Service Administration includes MFCCs in all government procurement contracts (e.g., office supplies, plane tickets).

MFCCs are also present in Medicaid drug procurement rules, guaranteeing Medicaid the biggest discount offered to a commercial payer. Previous research has provided empirical evidence that the Medicaid MFCC distorts commercial market prices:

Increases prices of branded drugs facing generic competition (Scott Morton, 1998).

Open question: does the Medicaid MFCC also impact branded drugs that are still patent-protected?

These are the drugs that drive most of the spending in both Medicaid and commercial markets

The 2010 Rule Change and Its Effects

We exploit a 2010 rule change that effectively reduced the scope of the Medicaid MFCC. The change, implemented as part of the ACA, increased the minimum mandatory rebate from 15.1% to 23.1%, reducing the drugs to which the MFCC applies.

The data we use comes from SSR Health, which tracks list prices, Medicaid sales and rebates, and average sales and discounts in the non-Medicaid segments of the drug market. This last component is an addition to the data typically used in previous research.

Using a difference-in-difference framework based on differential exposure to the Medicaid market, we evaluate how the reform affected average discounts and total revenue in non-Medicaid segments of the market. We find that discounts go up and revenue goes down after the ACA rule change. A conservative estimate of the impact on commercial market spending is about a 2.5% decrease.

We also find that list prices (AMP/WAC) of drugs with high Medicaid exposure generally exhibit lower growth rates, likely due to the inflation penalty. This adds nuance to results in Duggan and Scott Morton (2006). They find that, in the cross-section, drugs with higher exposure to Medicaid have higher list prices. This likely reflects two opposing forces: i) an incentive to set higher initial list prices ii) smaller subsequent list price growth.

Implications for the Medicaid MFCC

We also use the reform to speak to the Medicaid MFCC. While the rule change isn't directly changing the MFCC, we use a model based on Cooper and Fries (1991) to isolated drugs that face a change in incentives equivalent to the removal of the Medicaid MFCC.

We confirm this empirically using a triple-difference approach. The "high exposure" group has the biggest response, followed by the low exposure and zero groups.

We then use these estimates to provide a back-of-the-envelope calculation on what would have happened if Medicaid removed the MFCC in 2010. We estimate that the removal would have reduced commercial market spending by 3.5%.

Implications for Literature

Policy Implications

Price restrictions: one can incorporate other types of restrictions into bargaining frameworks to understand implications for prices and welfare. In particular, it's possible that price transparency initiatives could lead to informal referencing across buyers and potentially higher prices overall.
Research into prescription drug markets: the additional insights that can be gained from using novel, albeit imperfect, data on discounts and net sales.

The ACA rule change appears to have lowered drug spending for both Medicaid and commercial payers, although our analysis is limited to drugs already on the market. Drugs launching in the future have more flexibility in setting list prices and may also anticipate the potential for future changes to the mandatory rebate.
Inflation penalty provisions, which have been proposed for Medicare Parts B and D, will increase initial list price but lower subsequent growth. The overall effect depends on how responsive initial list prices are (see e.g., Ridley and Lee, 2020).

Google Sites

Report abuse