THE STRATEGIC RESPONSE BY PHARMACEUTICAL FIRMS TO THE MEDICAID MOST-FAVORED-CUSTOMER RULES

In 1991 a most-favored-customer (MFC) rule was adopted to govern pharm aceutical prices paid by Medicaid. Theoretical models show that an MFC rule commits a firm to compete less aggressively in prices, I find th at the price of branded products facing generic competition rose (4% o n average). Brands protected by patents did not significantly increase in price, Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC; I find that generic firm s raise price more as their markets become concentrated, Hospital pric es show little; change, The results suggest that the MFC rule caused h igher prices for some pharmaceutical consumers.