The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing

Mark Duggan, Fiona Scott Morton

NBER Working Paper No. 10930
Issued in November 2004
NBER Program(s):Health Care, Industrial Organization

The federal-state Medicaid program insures 43 million people for virtually all of the prescription drugs approved by the FDA. To determine the price that it will pay for a drug treatment, the government uses the average price in the private sector for that same drug. Assuming that Medicaid recipients are unresponsive to price because of the program's zero co-pay, this rule will increase prices for non-Medicaid 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 findings suggest that the Medicaid rules substantially increase equilibrium prices for non-Medicaid consumers. Specifically, a ten percentage-point increase in the MMS is associated with a ten percent increase in the average price of a prescription. This result is robust to the inclusion of controls for a drug's therapeutic class, the existence of generic competition, the number of brand competitors, and the years since the drug entered the market. We also demonstrate that the Medicaid rules increase a firm's incentive to introduce new versions of a drug at higher prices and find empirical evidence in support of this for drugs that do not face generic competition. Taken together, our findings suggest that government procurement can have an important effect on equilibrium prices in the private sector.

download in pdf format
   (329 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10930

Published: Duggan, Mark and Fiona M. Scott Morton. "The Distortionary Effects Of Government Procurement: Evidence From Medicaid Prescription Drug Purchasing," Quarterly Journal of Economics, 2006, v121(1,Feb), 1-30. citation courtesy of

Users who downloaded this paper also downloaded* these:
Fong and Schwarz w14718 Towards an Efficient Mechanism for Prescription Drug Procurement
Duggan and Scott Morton w13917 The Effect of Medicare Part D on Pharmaceutical Prices and Utilization
Chen and Whalley w17365 The WTO Government Procurement Agreement and Its Impacts on Trade
Duggan w9626 Does Medicaid Pay Too Much for Prescription Drugs? A Case Study of Atypical Anti-Psychotics
Duggan and Hayford w17236 Has the Shift to Managed Care Reduced Medicaid Expenditures? Evidence from State and Local-Level Mandates
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us