Working Paper: NBER ID: w19367
Authors: Abby Alpert; Mark Duggan; Judith K. Hellerstein
Abstract: Generic drugs comprise an increasing share of total prescriptions dispensed in the U.S., rising from nearly 50 percent in 1999 to 75 percent in 2009. The generic drug market has typically been viewed at the wholesale level as a competitive market with price approaching marginal costs. However, the large presence of third party payers as final purchasers may distort prices at the retail level relative to what a standard model of price competition would predict. In this paper, we investigate how generic drug producers compete in the presence of the procurement rules of the Medicaid program. Medicaid reimbursement to pharmacies, like that of other payers, is based on a benchmark price called the average wholesale price (AWP). The AWP is reported by generic producers themselves, and until recently has been subject to essentially no independent verification. As a result, generic producers have had an incentive to compete for pharmacy market share by reporting AWPs that exceed actual average wholesale prices, as this "spread" leads to larger pharmacy profits. In 2000, after a federal government audit of actual wholesale prices of generic products, states were advised to reduce Medicaid reimbursement by as much as 95% for about 400 generic and off-patent drug products. We use variation induced by the timing of this policy along with its differential impact on drug products' Medicaid reimbursement to estimate the impact of this exogenous price change on the market share of targeted products. Our findings indicate that pharmacies did respond to the perverse incentives of the Medicaid program by dispensing products with the highest AWPs. Overall, the Medicaid market share fell by about 45% for targeted drug products as a result of the policy.
Keywords: Generic Drugs; Medicaid; Average Wholesale Price; Pharmaceutical Spending
JEL Codes: H57; I11; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DOJ intervention (L49) | AWP changes (C22) |
| AWP changes (C22) | pharmacy purchasing patterns (L42) |
| pharmacy purchasing patterns (L42) | market share of targeted drugs (L65) |
| AWP changes (C22) | market share of targeted drugs (L65) |
| AWP changes (C22) | competitor drugs dispensed (L42) |
| pharmacy purchasing patterns (L42) | competitor drugs dispensed (L42) |