Medicaid influence in the drug market

In 2005, Medicaid spending on prescription drugs represented 19 percent of overall US spending on this healthcare category; also, Medicaid's market share for an average drug was 18 percent of prescriptions filled. These statistics indicate the major role that the Medicaid program plays in funding prescription drugs. To date, there has been little analysis of how Medicaid reimbursement decisions impact drug market prices. Before 1990, Medicaid had no influence on setting the prices for the drugs they purchased, reimbursing on a fee-for-service basis to retail pharmacies and hospitals. Because of the Omnibus Budget Reconciliation Act of 1990 (OBRA'90), Medicaid had access to drug company information on the lowest price charged to other buyers (the “best price”) and this price was to be used as a reference base for Medicaid purchases. In this way Medicaid gained some power in price negotiations with pharmaceutical companies, changing the program from a simple price-taker buyer to an organization with ability to influence price. While immediately following 1990, the prices paid by Medicaid for the drugs purchased may have been lower than the ones paid before OBRA'90, the dynamic feedback for drug companies to raise the “best price” as a reference base may have resulted in higher market price over time. In our paper, we estimated a model of the influence of Medicaid market share (MMS) of a drug, (calculated as proportion of total sales reimbursed by Medicaid) on average price per prescription. IMS provided a dataset containing 398 new drugs launched in the US from December, 1984, to October, 2003, during which each drug was tracked for 60 months. Using panel data analysis we investigated the effect of MMS on both acquisition price (pharmacy's cost) and retail price (cost to the purchaser), controlling for other variables that determined the price of a drug: number of substitutes, presence of generic competitors in the same therapeutic class, and the number of quarters the drug has been on the market. Coefficient estimates revealed the existence of a direct relationship between the Medicaid market share of a drug and the average price per prescription. We concluded that Medicaid's presence in the price negotiation process created an unforeseen incentive for the pharmaceutical companies to raise the overall market price, modifying the outcomes for buyers over time. It also generated cost-shifting from the government as third-party payer to other third party payers or even to out-of-pocket sources for non-Medicaid patients.