The Journal of Industrial Economics 0022-1821 Volume LXVIII March 2020 No. 1

THE JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821
Volume LXVIII March 2020 No. 1
ANY WILLING PROVIDER AND NEGOTIATED RETAIL

PHARMACEUTICAL PRICES*
Daniel Hosken†
DaviD scHmiDt‡ mattHew c.
weinberg§
Any Willing Provider (AWP) regulations require insurers to allow

health care providers network membership, eliminating an insurer’s
ability to commit to a limited network of providers. We study the effect
of AWP on prices negotiated between insurers and providers by
exploiting the introduction of a regulation targeting retail pharmacies
in the state of Maine. Using insurance claim level data and across state
variation in exposure to the regulation, we estimate increases in
negotiated pharmaceutical prices. Our results are consistent with AWP
regulations’ reducing competition by inhibiting the ability of insurers
to move demand across competing pharmacies.
I. INTRODUCTION
in tHe UniteD states, insUreD inDiviDUals typically pay a small fraction of the incremental
cost of medical services. Accordingly, healthcare providers have less ability to
compete by offering lower prices to end consumers than in typical markets.
Instead, competition in these markets primarily takes place through plan
administrators, who have the ability to provide plan members financial
incentives to use particular providers (Town and Vistnes [2001]; Sorensen
[2003]). As of 2017, it is estimated that 12 per cent of employer sponsored
health plans with at least fifty members included a restricted network of
healthcare providers or a tiered network in their largest plan (Kaiser [2017]).
An even greater
*We thank seminar participants at Drexel University, the U.S. Federal Trade Commission,
Princeton University, Rutgers University, and the University of Texas at Austin, and we thank
Daniel Gilman, Devesh Raval, Ashley Swanson, Mike Vita, and Brett Wendling for helpful
comments and Marty Gaynor for encouragement and support in starting this project. Health Care
Cost Institute (HCCI) provided the claims data from Aetna, Humana, and UnitedHealthcare that
were used in this analysis. We thank Amanda Frost for helping us understand the HCCI data and
Benjamin Chartock, Minhae Kim, and Sarah Schutz for careful research assistance. The authors
have no financial interests related to this project to disclose and any mistakes are our own. The
© 2019 The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd
2 DANIEL HOSKEN, DAVID SCHMIDT, AND MATTHEW C. WEINBERG
views expressed in this paper are those of the authors and do not necessarily represent the views of
the Federal Trade Commission or any individual Commissioner.
†
Authors’ affiliations: U.S. Federal Trade Commission, 600 Pennsylvania Avenue, NW,
Washington, D.C., U.S.A. e-mail: dhosken@ftc.gov
‡
U.S. Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington D.C., U.S.A. e-
mail: dschmidt@ftc.gov
§
The Ohio State University, 1945 N. High Street, Columbus, Ohio, U.S.A.
e-mail: weinberg.133@osu.edu
1
share of plans offer incentives to visit particular pharmacies. The Pharmacy
Benefit Management Institute, for example, estimates that 36 per cent of plans
used cost sharing to provide incentives for members to visit pharmacies
offering lower prices, and 14 per cent of plans used limited networks that
excluded at least two-thirds of retail pharmacies (PBMI [2016]). Additionally,
the cost savings associated with selective contracting may be substantial:
narrow pharmacy networks have been claimed to reduce the retail pharmacy
component of drug spending by up to 12% relative to broad networks by
industry experts (Trompeter and Brown [2014]).
Some U.S. federal and state laws limit the ability of healthcare plans to
selectively contract with providers. At the federal level, Medicare Part D drug
plans are required by law to allow any pharmacy willing to accept the baseline
terms and conditions of the plan to belong to the basic tier of the plan’s
pharmacy network.1 The most common state level restrictions are ‘Any Willing
Provider’ (AWP) laws that, in their strongest form, require plans to accept all
providers willing to meet the terms and conditions of the network. AWP or
similar laws have been enacted in thirty-three U.S. states. While these laws may
benefit consumers by expanding access to a larger set of providers, they may
also impede the ability of plan administrators to obtain lower prices for medical
services and products. Providers may be willing to pay for the volume
associated with a preferred position in an insurer’s network by accepting a
lower reimbursement rate. AWP laws may prevent plans from guaranteeing that
volume, potentially raising prices.
This paper provides evidence on how AWP regulations change prices
negotiated between insurance plan administrators and pharmacies by studying
Maine’s enactment of an AWP law in March of 2010. Maine’s AWP law
limited plan administrators’ ability to selectively contract by requiring all
prescription drug plans subject to state law to allow any pharmacy willing to
meet network terms and conditions into its network. 2 The regulation has the
1 However, additional tiers with limited networks are increasingly used and associated with lower
prices (Starc and Swanson [2018]).
2 See Maine’s Bureau of Insurance Bulletin 377 for a description of insurers’ obligations to
comply with Maine’s pharmacy law: www.maine.gov/pfr/insur ance/legal/ bulle tins/pdf/377.pdf
(last accessed 8/9/2018).
ANY WILLING PROVIDER AND NEGOTIATED PHARMACEUTICAL PRICES 3
effect of eliminating the ability of plan administrators to form, or threaten to
form narrow pharmacy networks.3
The first part of the paper provides a simple theoretical framework to
illustrate how AWP laws may impact prices plans pay to providers. We develop
a model in which consumers choose between spatially differentiated
pharmacies under a plan that may impose differing copayments between the
pharmacies. The model compares prices paid to pharmacies under two distinct
mechanisms: a competitive contracting environment meant to represent the
world without AWP in which the plan auctions the exclusive right to be a
preferred pharmacy in the plan’s provider network, versus a posted price model
in which pharmacies are allowed to join any tier of providers under the
associated terms meant specifically to capture the constraints imposed by
Maine’s AWP law. The key difference is that under AWP, the insurer cannot
commit to providing an advantage to any pharmacy, which results in
equilibrium posted prices that are higher than the expected prices determined
through competitive bidding.
We then study the effect of Maine’s AWP law on drug prices using
individual prescription claims data from Health Care Cost Institute (HCCI)
(Cooper, Craig, Gaynor and Van Reenen [2019]). The data contains individual
prescription drug claims from three major insurers over a five-year period,
2009-2013, including the price of each prescription (both the consumer and
plan’s payment to the pharmacy), the specific drug purchased, and information
describing each member’s healthcare plan. HCCI’s data set contains claims
from all U.S. states, including approximately 26.9% and 32% of all individuals
with Employee Sponsored Health Insurance (ESI) in the U.S. and Maine,
respectively. A key advantage of using individual claims data is that we can
directly control for differences in drug composition across states over time by
examining a stable set of drugs. In addition, information on each member’s
healthcare plan allows us to focus on prescription drug plans that are directly
affected by the law.
We identify the price impact of Maine’s AWP law by comparing price
changes of the 1,000 most frequently prescribed branded and generic drugs
purchased in Maine to those in other U.S. states using both a difference in
difference estimator and the synthetic control method developed by Abadie,
Diamond and Hainmueller [2010]. AWP regulations tend to be in less populous
states, slightly poorer states and their presence may be correlated with
unobservable demand and cost factors that could also determine drug prices. By
exploiting Maine’s change in regulatory status along with claims data from
similar states, our research designs allow us to control for any confounders that
are either time-invariant or common across states.
3 To ensure compliance the state maintains a website that lists each of the prescription drug plans
being offered in the state that is subject to the law and the points of contact that a pharmacy can
address to join the plan. http://www.maine.gov/pfr/insur ance/publi catio ns_repor ts/ yearly_repor
ts/any_willi ng_pharm acy_report.html (last accessed 8/9/2018).
We find that average prices paid by affected plans in Maine increased
relative to other states by approximately 4% when using a difference in
difference estimator and by 9% when using the synthetic control estimator. The
price impact of the law varied substantially for branded and generic drugs.
Branded drug prices were largely unaffected by the law, while generic drug
prices were estimated to increase by about 5% when using the difference in
difference estimator and 10% when using the synthetic control. 4 The validity of
our results are supported by event studies and robustness to a range of
alternative comparison states used to control for common time shocks. Finally,
we found some evidence that the impact of the AWP law decreased over time.
For example, when using the synthetic control estimator, generic drug prices
were estimated to increase by about 14% in the year following the law’s
becoming effective but were only about 9% higher than the pre-regulation mean
by the end of the sample period.
Our paper contributes to a small but growing literature examining how
selective contracting affects healthcare pricing. Our paper is most similar to
Sorensen [2003], which develops a model of selective contracting and finds
empirical evidence that selective contracting significantly lower insurers’ price
for services. Cutler, McClellan and Newhouse [2000] and Gruber and
McKnight [2016] find that healthcare plans with more limited provider
networks were able to obtain lower provider prices. Dafny, Hendel and Wilson
[2015] find that plans offered on state Health Insurance Exchanges with
narrower provider networks also had significantly lower premiums, suggesting
these plans were able to obtain lower provider prices. Starc and Swanson
[2018] compare Medicare Part D plans that vary in how restrictive their
networks were and find that restrictive pharmacy networks had lower prices on
average for generic drugs, even after instrumenting for network narrowness, but
not for branded drugs. Finally, Ghili [2018], Liebman [2018], and Ho and Lee
[2019] develop empirical bargaining models that allow for exclusion and show
that this can significantly lower providers prices.
Our paper also adds to a small literature that studies AWP and similar laws.
Vita [2001], Durrance [2009], and Klick and Wright [2015] examine how a
state’s implementation of either an AWP or Freedom-of-Choice (FOC) law
affected aggregate state level expenditures on affected services, and find
evidence that these laws significantly affect medical expenditures. 5 In contrast
to these papers, we use claims level data, allowing us to hold fixed the
composition of drugs sold in a state. We are also able to directly focus on fully-
insured plans subject to AWP and not self-insured plans that are exempt from
4 Lakdawalla and Yin [2015] also found that retail branded drug prices were unaffected and
retail generic drugs price significantly reduced in their investigation of spill-overs of Medicare Part
D on prices paid by ESI plans.
5 In contrast to AWP laws that allow providers to join healthcare plans, FOC laws allow
consumers to select providers not included in their health plan’s network. FOC laws often allow
plans to offer lower levels of reimbursement to non-network providers and are typically seen as less
effective constraints on selective contracting than AWP laws.
the regulation. In addition, we are able to estimate any impact separately for
generic and branded drugs, a distinction that is potentially important if there are
more rents to be split between pharmacies and plan administrators when there is
upstream competition among drug manufacturers than when there is not.
Finally, we estimate an event study version of our differences in differences
regression that allows us to assess the validity of our research design by
comparing pre-trends and to explore the exact timing of when any impact took
place.
The remainder of our paper is organized as follows. Section II provides
institutional detail describing price setting in retail pharmacy markets, and how
AWP laws affect those markets. Section III presents our model of selective
contracting in retail pharmacy markets. Section IV describes our data, and
Section V describes our statistical model and results. Section VI concludes.
II. INSTITUTIONAL BACKGROUND
The interpretation of our results and our identification strategy depend crucially
on the details of the interactions between various parties in the provision of
pharmacy benefits, particularly intermediaries. Because Employee Sponsored
Insurance (ESI) is the primary type of insurance affected by the regulations we
study, we limit our analysis to the prices of drugs purchased by members of ESI
prescription drug plans. Approximately forty-nine per cent of U.S. residents had
ESI in 2016,6 making it the most common type of insurance. When providing
health insurance, most employers (plan sponsors) hire an insurance company to
help design and administer their employees’ health benefit plans. The insurance
company, in turn, often subcontracts the administration of the prescription drug
portion of the health benefit plan to specialist firms known as a Pharmacy
Benefit Managers (PBM).7
The PBM administers and helps design the prescription drug benefit plan.
PBM’s employ two primary strategies to manage costs, both of which can be
tailored to satisfy the objectives of the insurer, which presumably reflect the
preferences of the employer. First, and of primary importance for this study,
PBM’s establish pharmacy networks. A PBM’s contract with a pharmacy for a
particular pharmacy network specifies the terms of payment to the pharmacy in
exchange for dispensing prescriptions. The terms of these agreements are
determined in part by the PBM’s ability to exclude a pharmacy from a network
or to provide financial incentives for members to visit particular pharmacies
through differential out-of-pocket payments, such as copayments. In other
6 See State Health Facts from the Kaiser Family Foundation at https ://www.kff.org/other/ state-
indic 4ator/ total-popul ation/ .
7 Sometimes an employer will hire an insurance company to administer everything but the
pharmacy benefit, and the employer will then bid out the pharmacy benefit portion of their health
coverage separately, and will contract directly with a PBM. Whether the PBM is hired by an insurer
or an employer is not an important distinction for our analysis, so we will describe the process as if
all employers hire a PBM via an insurer.
words, the plan design may allow the PBM to move market share between
pharmacies, and consequently, the PBM may be able to leverage that power
when negotiating contract terms with pharmacies. Second, PBM’s utilize a
formulary–a list of drugs covered by the plan that stipulates members’ out-of-
pocket costs, which vary by drug.8 This is another source of leverage for the
PBM to negotiate discounts, this time with branded drug manufacturers who
offer rebates in exchange for preferential treatment on the formulary which
corresponds to a lower out-of-pocket cost for the member. We do not observe
rebates paid by manufacturers to PBM’s in our data. The inability to control for
rebates is often cited as a major problem when evaluating branded drug prices,
although it is not an issue in this analysis. We are analyzing how AWP laws
influence one input into the provision of a pharmacy benefit, which is the
amount a PBM pays pharmacies to dispense prescriptions. Generally speaking,
a PBM will pay the pharmacy the same discount off of list price for all branded
drugs covered by the plan, regardless of any rebates the PBM may receive from
manufacturers, and rebates do not depend on the contractual terms between the
PBM and the pharmacies.
The breadth of pharmacy networks varies considerably. The large PBM’s
each maintain thousands of networks to suit the needs of their various
customers, differentiated by the number and identity of included pharmacies.
Many pharmacy networks are quite broad including virtually all pharmacies
operating in a region (open networks); others offer members financial
incentives to fill prescriptions at preferred pharmacies (preferred networks) but
still provide some compensation for prescriptions filled at non-preferred
pharmacies. Some narrow networks offer no reimbursement for prescriptions
filled at out-of-network pharmacies.9
‘Any Willing Provider’ (AWP) and ‘Freedom of Choice’ (FOC) laws place
restrictions on the ability of PBM’s to form networks that limit consumers’
choice of providers. FOC laws require health plans to provide some level of
reimbursement to plan members when visiting out of network providers. Most
state FOC laws allow plans to discourage members from using out-ofnetwork
providers by requiring higher copayments or deductibles, and are frequently
limited to requiring plans to reimburse providers in emergency situations where
in-network providers are not viable options. As a result, FOC laws place
relatively few restrictions on managed care plans’ ability to selectively contract
(Marsteller, Bovbjerg, Nichols and K. Verrilli [1997]).
By contrast, AWP laws, in their strongest form, require health plans to
include any provider willing to accept the network’s terms and conditions. This
means that if a PBM negotiated reimbursement and service terms with a
pharmacy chain to join a particular network, that PBM would be required to
offer access to that pharmacy network to all other pharmacies willing to accept
8 See Berndt and Newhouse [2012] for an excellent description of the use of formularies by
PBM’s to control drug spending.
the same terms. In practice, there is a great deal of variation in AWP laws
across states. Marsteller, Bovbjerg, Nichols and K. Verrilli (1997) identify two
aspects of AWP laws most likely to inhibit the formation of narrow networks.
First, AWP laws differ in whether access to a pharmacy network is defined to
be an ‘opportunity’ or a ‘right.’ If access is an opportunity, it 9 Trompeter and Brown
[2014] note that a typical full network will include around 61,000 pharmacies, while narrow
networks can include fewer than 50,000 pharmacies, and sometimes as few as 20,000 or even 4,400
pharmacies.
Figure 1
States with Any Willing Provider or Freedom of Choice Laws for Pharmacies [Colour
figure can be viewed at wileyonlinelibrary.com]
is only required that pharmacies be allowed to participate in the process of

network formation, i.e., have the ability to submit a bid to join the network. The
AWP law may state that health plans must periodically (e.g., every three years)
allow pharmacies to submit bids to join networks and explain how the bids will
be evaluated. Alternatively, if access is a ‘right,’ the law requires that
pharmacies can decide whether or not they want to join any network and
specifies the rights of pharmacies who feel they have been inappropriately
excluded. Second, state AWP laws differ in how in and out-of-network
pharmacies can be compensated by health plans. Some states explicitly require
that all pharmacies receive identical compensation. In other states, AWP laws
allow the health plan to create a group of preferred pharmacies who are willing
to accept lower compensation in exchange for plan’s being structured to
encourage members to use preferred providers (e.g., with lower copayments).
During our sample period, twenty-eight states had some form of AWP or
FOC law that restricts the ability of insurers to utilize narrow pharmacy
networks (shown in Figure 1). Five states had relatively strict laws, granting
pharmacies the right to join a network and banning differential payments; three
states banned differential payments; eight state’s laws grant pharmacies the
right to join a network, and the remaining states have a more general form of an
AWP and/or FOC law.
In general, insurance markets are governed by state laws and regulations.
However, an important distinction determines whether a pharmacy benefit plan
is subject to state laws such as AWP and FOC laws. In order to prevent multi-
state employers from being required to create health benefit plans that satisfy a
diverse and potentially conflicting set of state laws, the 1974 Employee
Retirement Security Act (ERISA) preempted many state laws that govern an
employer’s provision of health benefits to employees, depending on how the
benefit is provided. Health plans are defined to be ‘fully-insured’ if an
insurance company both bears the financial risk associated with the health
benefit plan and administers the plan, in which case the insurer, and thus the
plan, is subject to applicable state laws. If the plan sponsor bears the risk
associated with the health plan (i.e. is ‘self-insured’), the health benefit plan is
an employee benefit offered by an employer, and is thus governed by federal
laws and exempted from some state laws when preempted by ERISA. In
particular, the ERISA preemption allows self-insured ESI pharmacy benefit
plans to assemble narrow pharmacy networks, even in AWP or FOC states,
while fully- insured ESI pharmacy benefit plans are subject to state AWP and
FOC laws.
Only one state enacted an AWP law affecting pharmacies during our sample
period–the state of Maine. Its law was passed in March of 2010, and became
effective on July 12, 2010. 9 Maine’s law is among the more restrictive AWP
laws in the U.S. The law requires that all health insurance plans subject to
Maine’s state law allow any Maine pharmacy into the provider network if it is
willing to meet the terms and conditions of the network. Plan administrators are
required to provide pharmacies with standard contracts describing their plans,
and these descriptions are posted on a state website along with the points of
contact that a pharmacy can contact to join the network. 10 Existing prescription
drug plans were required to comply with the law at the earliest of two dates: the
next contract renewal date or July of 2011.
The law allows plans to offer pharmacies different levels of reimbursement
(described in the law as tiered networks), however, pharmacies may choose
their tier. For example, a plan can offer a pharmacy preferred status if the
pharmacy agrees to accept lower reimbursement (e.g., a $2 fee for filling a
prescription instead of a $5 fee) from the health plan in exchange for the plan
9 We have been unable to identify any discussion of the legislative intent of Maine’s AWP law.
A newsletter put out by H.D. Smith, which at the time was the fourth largest pharmaceutical
wholesaler in the U.S., said that the wholesaler lobbied in support of this law. That newsletter
included the following quote from Ron Lanton, Government Affairs Counsel: ‘Independent
pharmacies are the heart of our communities, and it is imperative that we continue our unwavering
support for this noble profession.’ H.D. Smith Pharmacy Forum, Volume 6, Issue 4, April, 2011.
10 The state maintains a website that lists each of the prescription drug plans being offered in the
state that are subject to the law and the points of contact that a pharmacy can contact to join the
plan. http://www.maine.gov/pfr/insur ance/publi catio ns_repor ts/yearly_repor ts/any_willi
ng_pharm acy_report.html (last accessed 8/9/2018).
design’s giving members an added incentive to use that pharmacy, for instance,
via a lower copayment of $10 at that pharmacy compared to $20 at a non-
preferred pharmacy. Because the tiers are open to all pharmacies subject to the
law, a plan’s ability to achieve a narrow network is limited. Maine amended its
AWP law in 2011 to clarify that insurers could not force a pharmacy to
participate in one network as a condition of joining another. In particular, an
insurer could not condition a pharmacy’s participation in a network exempt
from Maine’s AWP law on also participating in a network subject to the law or
vice versa.12
Because only members of fully-insured plans in Maine are subject to the
AWP law, only the drug prices of the fully-insured should be directly affected
by the enactment of the law. We use the prices paid by members of fully-
insured plans in other states as comparison prices for Maine’s drug prices for
three reasons. First, only fully-insured plans are subject to state laws like AWP
laws. Second, the employers choosing fully-insured plans are systematically
different from those choosing to self-insure. Firms that self-insure are much
larger than those that choose a fully-insured plan. 11 Third, the type of insurance
product chosen by plans differs for self-insured and fully-insured plans. For
example, members of self-insured plans in the HCCI data are more likely to
belong to a plans with broader networks than those in fully-insured plans.12
III. AN ILLUSTRATIVE MODEL
This section introduces a new model in which consumers select between two
pharmacies based on spatial differentiation between the pharmacies as well as
the terms of their pharmacy benefit plan which may impose differential cost
sharing based on the pharmacy choice. Within this context, we evaluate two
mechanisms by which a plan can contract with pharmacies: one in which the
plan can essentially sell its ability to move market share to a particular
pharmacy and one where it cannot. The mechanism in which the plan can
exploit
11 The Kaiser Foundation estimated that in 2013 approximately 16% of workers from firms with
fewer than 200 employees with ESI insurance were in self-insured plans while virtually all (94%)
of workers in firms with more than 5,000 employees were in self-insured plans. (Kaiser [2014],
page 156). In the Health Care Cost Institute (HCCI) data used in this study, all members of self-
insured plans are in what HCCI refers to as large firms (having more than 50 employees).
12 In the HCCI data, more than 99% of members with ESI insurance reporting prescription drug
claims have one of four types of insurance: Health Maintenance Organizations (HMO), Exclusive
Provider Organizations (EPO), Point of Service (POS) and Preferred Provider Organizations
(PPO). HMO and EPO plans tend to be the most restrictive in limiting access to providers outside
of their networks, and have relatively narrow provider networks. POS and PPO plans combine
elements of both traditional indemnity insurance and managed care. Both have networks of
preferred providers and offer members financial incentives (typically lower copayments) to
encourage members to use those providers. However, in most cases, members of POS and PPO
insurance plans that use out of network providers will receive some reimbursement. In the HCCI
data, approximately 82% of members of self-insured plans have PPO or POS insurance, while 63%
of members of fully-inured plans have PPO or POS insurance.
12
Maine’s AWP law is similar to the Medicare Part D AWP requirement in that they both require
plans to contract with any pharmacy willing to accept the terms of the plan’s basic pharmacy tier,
and they both allow for preferred tiers. However, Medicare Part D rules allow plans to exclude
pharmacies from preferred tiers, unlike the Maine law. Because the Maine AWP law provides
greater restrictions on plans’ abilities to contract selectively than Medicare Part D, it is likely that
the Maine AWP law would have a larger impact on pricing than Medicare’s AWP requirement, all
else equal. As a result, studies that examine selective contracting in Medicare Part D, e.g., Starc and
Swanson [2018], likely provide a lower bound on how strict state level AWP laws like Maine’s
affect price.
its ability to move market share is based on an auction model introduced by
Sorensen [2003] in which pharmacies compete by offering lower prices,
sacrificing margin, in order to attain disproportionate market share. While our
model of consumer choice yields the same aggregate demand assumed by
Sorensen, building the demand from primitives allows us to more carefully
examine the levers available to the plan to move market share. Additionally,
this section introduces original analysis of an alternative mechanism by which
plans can contract with pharmacies that do not allow the plan to exclude a
pharmacy from a tier, as in the auction framework. This posted price
mechanism is based on the explicit requirements of Maine’s AWP law. This
allows us to demonstrate how AWP laws may hinder the ability of plans to
leverage competition between pharmacies in order to obtain better pricing.
A two-pharmacy model is sufficient for our purposes. The differentiation
between the pharmacies, perhaps geographic, is represented by their being
located at the endpoints of a Hotelling line. Pharmacy 0 is located at position 0,
and pharmacy 1 is at position 1. The pharmacies incur a marginal cost from
serving each member, which is private information. For example, this cost
might represent the pharmacy’s acquisition costs of the drugs that will be
dispensed, which is generally not observed by the plans or by competing
pharmacies. To represent this uncertainty, the costs are assumed to be random
variables drawn from a uniform distribution on the unit interval with pdf of f
(ci) = 1 and cumulative distribution function F(ci) = ci for ci ∈[0,1], i = 0,1.15
The plan establishes a network to serve its members, who are evenly
distributed over the interval between the two pharmacies. Over the course of the
contract, each member will visit one pharmacy or the other to get a prescription
filled, from which they will receive a positive payoff of μ > 0, or will pursue
their next best alternative with a normalized net payoff of zero. 13 Members,
under the terms of their plan, pay out-of-pocket costs of op if they visit a
preferred pharmacy and os at a standard pharmacy, where preferred status
implies op < os. For example, this might be a copayment paid by the member to
the pharmacy.14 Members also incur travel costs of τ for each unit of distance
13 Another interpretation of the model is that the member picks a pharmacy and gets their entire
year’s worth of prescriptions filled at one pharmacy or the other.
14 Under some conditions, this could also be a model of formation of a narrow network where
‘preferred’ pharmacies are in-network and ‘standard’ pharmacies are out-of-network. At out-of-
network pharmacies, members pay the entire cost of the drug, so os would be the out-of-network
pharmacy’s cash price. When this individual plan is small relative to the pharmacy’s uninsured
business, it may be reasonable to assume that the uninsured price is unaffected by the network
traveled. Therefore, the member located at location x would incur 15
If the
pharmacies’ costs consisted of the random component plus a common, known component, k, the
cost random variable could be drawn from [k,k+1], and all of the equilibrium prices calculated in
this section would be increased by adding k. Therefore, when comparing the percentage change
between two equilibrium prices, k would only increase the denominator. When the uncertain part of
costs is a smaller portion of the total, the relative predicted price differences between these models
will be smaller. We will discuss how this relates to brand and generic drugs below.
travel costs of τx when visiting pharmacy 0, and τ(1−x) when visiting pharmacy
1. We will assume that the plan provides sufficient coverage such that all
members would find it worthwhile to get the prescription filled from even the
less attractive of these two pharmacies rather than pursue their next best
alternative, which would be satisfied as long as 𝜇 > 𝜏 + os.
The share of members visiting each pharmacy is determined by finding the
member who is indifferent between the two pharmacies because all other
members will strictly prefer to visit the relatively nearer pharmacy. Obviously,
if both pharmacies are on the same tier, they will each get the 50% of the
members located closer to them. Suppose instead that pharmacy 0 is preferred
and pharmacy 1 is standard, then the indifferent member x is given by 𝜇−𝜏x−op
= 𝜇−𝜏(1−x)−os,
os−op +𝜏
or x = . It will be convenient to describe the plan’s choice of copayments in
terms of the differential between the standard and preferred copayments nor- 2𝜏
malized by the travel cost, so let 𝜃 = os−op. θ can be thought of as a measure of
𝜏 how willing the plan is to steer patients
to a preferred pharmacy because it is the share of the members located closer to
the standard pharmacy that will instead go to the preferred pharmacy due to the
copay differential.
One could imagine various ways the plan could establish its network. We
first consider a network formation mechanism that allows the plan to offer a
contract that promises a pharmacy an advantage over the other pharmacy,
which is essentially Sorensen’s auction model. The plan auctions the exclusive
right to be the preferred pharmacy to the single pharmacy with the lower bid,
allowing the losing pharmacy to be on the standard tier. We next consider a
second network formation mechanism in which the plan posts prices for each of
the tiers, allowing each pharmacy to select which tier to join. This closely
represents the requirements of the Maine AWP law, which prevents the plan
from selling a level of exclusivity.
III(i). The Auction Model without AWP

The plan first announces its design characteristics, namely the copayment
structure, then solicits bids from the two pharmacies with the understanding
that the lower bidder will be placed on the preferred tier and the higher bidder
design of this plan.
will be on the standard tier. 18 Pharmacies on the standard tier are paid a price of
one to ensure their participation in the standard tier, perhaps in order to satisfy
network adequacy requirements. After observing their own cost draw, each
pharmacy i submits a price, pi, at which it is willing to fill 18 As an alternative to
thinking of this as an auction run by the plan, we can imagine a PBM forming two networks, one in
which Pharmacy A is the lone preferred pharmacy and another in which Pharmacy B is the lone
preferred pharmacy. The PBM solicits prices from each of the pharmacies for these networks, then
offers their customers (employers) a choice between the networks. A plan that is indifferent
between the pharmacies will select the network with the lower price, which would create pricing
incentives for the pharmacies identical to those in the auction model described here.
prescriptions for each member if selected as the preferred pharmacy, so this is
like a first-price procurement auction. These bids are selected in order to
maximize the pharmacy’s expected profits:
1 +𝜃 1−𝜃
(1) maxProb(pj ≥pi)(pi −ci) +Prob(pj <pi)(1−ci) ,j ≠i.
pi 2 2
As in Sorensen [2003], the equilibrium bid function can be shown to be b(ci)

= 11++𝜃𝜃ci. The average expected price depends on the distribution of the
minimum cost draw, c, which is distributed according to g(c) = 2(1−c). The
expected price paid in equilibrium is:
E(pbid:noawp) .
The ability of the plan to provide incentives for members to visit the
preferred pharmacy rather than the standard pharmacy is an important
determinant of how aggressive the pharmacies will be in bidding prices down
within the support of the distribution of their cost draws.
III(ii). Posted Price Model under AWP

One mechanism to build a network under an AWP requirement that is more or
less prescribed by the Maine AWP law is to have the plan post the price it will
pay to preferred pharmacies, and let each pharmacy decide independently
whether it wishes to be preferred or standard. When a pharmacy is deciding
whether to join the preferred tier, it knows its own cost draw and the price
posted by the plan, but not the cost or tier decision of the other pharmacy.
Suppose pharmacy i thinks pharmacy j will join the preferred tier for any cj <
ĉ(p), where p is the price posted by the plan, and will otherwise join the
standard tier. In order for this to be a symmetric equilibrium, pharmacy i must
also be indifferent between being preferred or standard at ci = ĉ(p), which is the
case if (p−ĉ(p))(F(ĉ(p))1+(1−F(ĉ(p)))( 1+𝜃
)) = (1−ĉ(p))(F(ĉ(p)) +(1−F(ĉ(p)))( )),
p+𝜃p−1 2 2 or ĉ(p) = .
𝜃p
Taking into account the likelihood that the pharmacies will join as preferred
pharmacies, the plan chooses the preferred price in order to minimize the
expected price.
1+𝜃 1−𝜃
minF(ĉ(p))2p+2F(ĉ(p))(1−F(ĉ(p)))( p+ )+(1−F(ĉ(p))2) p 2
2
1−(2+𝜃)p+(1+2𝜃)p2
=min
.p
𝜃p2
This reaches a minimum at p . Note that ĉ for all values of θ,
meaning that the posted price is set such that each pharmacy has a 50% 𝜃 chance
of having a cost draw low enough to choose to be a preferred pharmacy.
Plugging these values in to the expected price formula above yields an expected
price of 1− 𝜃.
The expected price in the posted price mechanism is strictly higher than the 4
expected auction price by θ/12. Intuitively, the AWP law’s effect on expected
prices depends on the plan’s ability to drive share to preferred pharmacies and
the closeness of competition between the pharmacies. The plan is better able to
leverage competition between the pharmacies when they are more
substitutable.15
In both mechanisms, pharmacies are only able to earn positive margins due to
their costs being private information, and their equilibrium prices will always
fall in the support of those cost draws. It is well known that pharmacies’
acquisition costs vary considerably for generic drugs but are relatively uniform
for branded drugs.16 Therefore it might be expected that AWP raises prices by
more for generic drugs than for branded drugs.
IV. DATA
15 This is similar to the finding of Ellison and Snyder [2010] that retailers buying antibiotics
were able to obtain discounts for generic antibiotics produced by multiple manufacturers, but not
for those produced by only one manufacturer.
16 See HHS-OIG [2011], which surveyed 120 pharmacies in 2010 to determine the invoice
prices those pharmacies paid for both brand and generic drugs, and compared those prices to
various aggregate cost measures for those drugs. In particular, HHS compared those invoice prices
to the Average Manufacturer Price (AMP) for that same drug to essentially determine how much
more or less that pharmacy was paying than the average pharmacy. Of 4,175 single-source brand
drug invoice prices analyzed, 94% were within ± 5% of the AMP. For multisource generics, only
9% of the roughly 2,900 invoice prices were within 5% of that drug’s AMP.
In fact, only 58% were within ± 50% of the AMP.
Our primary data set comes from the Health Care Cost Institute (HCCI). HCCI
maintains a data enclave that contains individual health insurance claims
obtained from three insurers (Aetna, Humana, and UnitedHealthcare) from
individuals with employer sponsored health insurance, individual plans, and
Medicare Advantage insurance. The HCCI data includes claims from all fifty
U.S. states and the District of Columbia, however, the proportion of privately
insured individuals varies substantially across the U.S. states. For example, in
2015 HCCI estimates that its data contains roughly 43.8% of those covered by
ESI in Texas but only about 2.1% of those in Hawaii. The data we are using
consists of a five-year panel of HCCI’s prescription drug claims from the
District of Columbia and all states but Hawaii between 2009 and 2013.
HCCI’s data includes information describing individual members of
healthcare plans, characteristics of those healthcare plans, and detailed health
claims information. In particular, the data set identifies the type of insurance
product offered by the plan (e.g., HMO or PPO), whether or not the employer
self-insures, and if the plan offers prescription drug coverage. Personal
characteristics identified in the data include member’s sex, age group indicators,
and the CBSA (Core Based Statistical Area) and state the member resides in.
Using this information, we limit our primary estimation sample to claims from
fully-insured ESI prescription drug plans. In addition, we exclude claims made
by members over age 65 because they are likely also eligible for Medicare Part
D coverage to control for any adverse selection into the estimation sample, i.e.,
individuals eligible for Medicare who instead choose ESI.
HCCI’s prescription drug claims data identifies the drug corresponding to
each prescription claim, the amount paid by the member for the drug (either as
a co-pay or co-insurance), the amount paid by the plan, the number of units
dispersed in the prescription (typically the number of pills), whether the
prescription was filled by a mail order pharmacy, specialty pharmacy, or a
traditional pharmacy, and the month and year the prescription was filled. The
claims data does not identify the pharmacy that filled the prescription. 17
As is the case with most individual claims data, HCCI has taken steps to de-
identify the data to preserve the member’s confidentiality. In particular, while
there is a unique member identifier that allows a given member to be tracked
over time, it is not possible to use the member identifier to identify members of
the same household, employer or insurance plan. Hence, it is not possible to use
the claims data to create an aggregate ‘price’ that corresponds to a single
employer or the specific insurance product purchased by the employer. For this
reason, we cannot identify the set of individuals facing the same financial
incentives to consume certain drugs (a specific health plan’s drug formulary) or
to purchase drugs at a given retail pharmacy (a specific health plan’s pharmacy
network).
17 We also do not observe premiums paid by the members or their wages, so we will not be able
to make any determination about the incidence of any price effects on members or employers.
HCCI’s prescription drug claims data only identifies the National Drug Code
(NDC) corresponding to a given claim.18 For this reason, we have matched the
HCCI prescription claims data to the Food and Drug Administration’s (FDA)
drug product files. The product files can be used to determine the brand name
for each drug (e.g., Singular), the non-proprietary name of the drug (e.g.,
montelukast sodium) that typically identifies the active ingredient in the
product, its dosage form (e.g., tablet), its strength (e.g., 10 mg), and if a drug
were branded or generic.19 We have been able to match 97.5% of the
prescription claims in the HCCI data with the FDA product files.
We define a drug as a unique combination of active ingredient in the drug,
the dosage form, strength, and therapeutic class (Tenn and Wendling [2014]).
For branded drugs with an in-force patent, only a single manufacturer has the
right to produce that drug. In this case, a drug’s NDC will uniquely identify a
drug. For generic drugs, it is often the case that multiple manufacturers produce
a given drug; that is, there can be multiple NDC’s corresponding to the same
drug. To construct the sales to correspond to a generic drug at a point in time,
we aggregate the revenue and number of units sold over all of the NDC’s with
the same active ingredient, dosage form, strength, and therapeutic class.
We limit our sample to those claims filled by traditional retail pharmacies.
We removed prescription claims by mail order pharmacies because these
pharmacies effectively can only supply prescriptions for treating chronic
conditions, and cannot practically deliver prescription drugs to treat acute
medical conditions. We also removed claims filled by specialty pharmacies
because the drugs sold by these pharmacies require a very high level of service
often at a very high cost, and are very differentiated from conventional retail
pharmacies.20 Finally, we have restricted the drugs in our sample to the most
commonly dispensed prescription drugs: those orally consumed. We make this
restriction to ensure that we are comparing the prices of products that require a
similar level of pharmacy services, e.g., checking insurance coverage, looking
for interactions with other prescriptions, answering any consumer questions,
counting the pills, and placing them in a container.
Our sample contains about 296 million prescription claims from members
with fully insured ESI prescription drug coverage. While there is a relatively
18 A drug’s NDC uniquely identifies both the firm marketing the drug (typically the drug’s
manufacturer) and the drug being sold.
19 We define a drug as being branded if it is the drug listed as having the marketing category
‘New Drug Application’ (NDA) which is the designation typically given to the drug when it is
initially marketed with an in-force patent. We define a drug as being generic if it is listed as having
the marketing category ‘Abbreviated New Drug Application’ (ANDA) or ‘NDA Authorized
Generic.’
20 The National Association of Specialty Pharmacies defines a specialty pharmacy as: ‘a state-
licensed pharmacy that solely or largely provides only medications for people with serious health
conditions requiring complex therapies.’ These include conditions such as cancer, hepatitis C,
rheumatoid arthritis, HIV/AIDS, multiple sclerosis, cystic fibrosis, organ transplantation, human
growth hormone deficiencies, and hemophilia and other bleeding disorders. See naspn et.org/wp-
conte nt/uploa ds/2017/02/NASP-Defin tions-final-2.16.pdf, (last accessed 6/14/2018).
large number of branded and generic drugs sold in the U.S. (about 3,000
branded and 2,600 generic drugs in our data), most prescriptions are written for
a relatively small number of drugs. For example, in our data the fifty most
commonly prescribed generic and branded drugs account for about 41% and
47% of prescriptions in our sample, and the 1,000 most frequently prescribed
drugs account for about 99% of branded and generic drug prescriptions. Rarely
prescribed drugs are especially unlikely to be observed in states with fewer
members. To ensure that the composition of drugs across states is similar in our
estimation sample, we limit our analysis to the most frequently dispensed orally
consumed drugs sold by conventional retail pharmacies (the 1,000 most
commonly prescribed branded and generic drugs). In our empirical analysis, we
explore how the passage of Maine’s AWP law differentially affected more and
less frequently prescribed drugs.
While, in principal, we could measure the relationship between a drug’s price
and the introduction of Maine’s AWP laws using individual claim level data,
this choice would require analyzing a data set with hundreds of millions of
observations. Instead, we construct a specific drug’s price by aggregating
claims to the state level, the level at which the AWP law varies. We also
aggregate over months to the quarter because some of the less frequently
prescribed branded and generic drugs are not observed in all months in some
states. We define a drug’s price as the average revenue received by the
pharmacy per unit (typically a pill) in a quarter as specified in Equation 2.
Specifically, the price of drug i in state s in quarter t is defined to the sum of the
total revenue paid to the pharmacy for each prescription k divided by the total
number of units of drug i dispensed in that state and quarter:
Total Prescription Revenue

(2) pist = ∑k istk .
∑k Unitsistk
Total Prescription Revenue in Equation 2 is defined as the sum of the payment

made by the PBM to the pharmacy for prescription k and the copayment (if any)
made by the consumer for prescription k. The average price per unit is
calculated for each quarter and state.
Table I shows descriptive statistics comparing Maine, states with AWP laws,
states without AWP laws, and those states in the Northeastern U.S. closest to
Maine (Connecticut, New Hampshire, New York, Massachusetts, Rhode Island,
and Vermont). The top panel shows that within each group generic and branded
drugs have very different prices. Across regions, the typical price of a branded
drug is about $5.97 a pill with a very large standard deviation. Generic drugs
are much less expensive, with a mean price of about $0.93 per pill and a much
lower standard deviation. None of the price differences between Maine and the
other regions are statistically significantly different from one another. 21
Table I also provides some information describing the characteristics of
health insurance plans consumed by members of fully-insured plans in these
regions. The most notable difference is that managed care plans are more
common in states without AWP laws. This may reflect a regulatory
environment more amenable to the approaches taken by managed care plans to
lower costs in those states.22
We also have obtained demographic and wage data from the BLS and the
Census at the state level which are used as controls in the analysis that is
21 P-values corresponding to the test that Maine’s value of a variable is equal to that in one of
the sets of comparison states are shown in brackets. For example, the p-value associated with the
comparison of Maine’s average generic drug price (0.93) with that of non-AWP states (0.89) was
0.16.
22 All differences between Maine’s variables and those of the comparison states were statistically
significant. The p-values are all effectively zero and are not reported.
18
t able i
D escriptive s tatistics from 2009, t H e y ear b efore e nactment of m aine ’s awp r eg U lation
(1) (2) (3) (4) (5)
All Other States without States with Northeastern
Price Measures Maine States AWP AWP States
Price Per Pill 3.14 3.20 3.18 3.22 3.22

(9.34) (9.19) (9.07) (9.34) (8.93)
- [0.58] [0.71] [0.45] [0.49])
Generic Price Per Pill 0.93 0.89 0.89 0.90 0.93
(2.04) (1.80) (1.79) (1.80) (1.85)
- [0.20] [0.16] [0.28] [0.89])
Branded Price Per Pill 5.97 5.92 5.88 5.96 6.08
(13.41) (12.91) (12.72) (13.11) (12.66)
- [0.85] [0.74] [0.98] [0.68]
Total Price Obs., 2009 Estimation Sample 6,572 310,006 166,927 143,079 34,311
Generic Price Obs. 3,697 167,611 90,317 77,294 19,035
Branded Price Obs. 2,875 142,395 76,610 65,785 15,276
Insurance Type
EPO or HMO 0.34 0.37 0.41 0.31 0.30
DANIEL HOSKEN, DAVID SCHMIDT, AND MATTHEW C. WEINBERG
PPO or POS 0.66 0.63 0.59 0.69 0.70

Small Plan 0.55 0.40 0.37 0.44 0.25
High Deductible 0.21 0.09 0.08 0.10 0.08
Members 53,922 7,877,058 4,839,329 3,037,729 559,724
t able i (continUeD)
(1 (2 (3 (4 (5
) All) )
States )
States )
Northeast
Price Mai Other
Stat without
AW with
AW ernStat
State
Measures ne es P P es
Populati
Characteristics 1,315, 6,205, 8,354, 4,453, 5,438,
on 889- [0.4
145 [0.3
533 [0.4
793 [0.6
452
Percentage of Population 21. 18.
8] 18.
5] 18.
6] 19.
2]
over Age 60 95- [0.0
32 [0.0
36 [0.1
28 [0.0
41
Percentage of Population in 12. 13.
8] 13.
4] 14.
5] 10.
2]
Poverty 60- [0.6
96 [0.6
90 [0.6
01 [0.4
98
Percentage of Children in 17. 19.
6] 19.
9] 19.
4] 14.
9]
Poverty 50- [0.7
17 [0.7
22 [0.7
12 [0.5
73
Annual Median Household 45,7 50,2
4] 51,0
6] 49,6
2] 58,4
1]
Income 08- [0.5
67 [0.6
85 [0.5
01 [0.1
52
Average Weekly Pharmacy 665. 673.
9] 681.
8] 667.
0] 642.
2]
Worker Wage 00 [0.8
41 [0.9
23 [0.7
04 [0.6
17
Not The top panel contains means and standard7]deviations (in parentheses)
7] of prices in 2009. An
3] observation is a drug/quarter/state.
New Hampshire, New York, Massachusetts, Rhode Island and Vermont. The middle
6] panel contains average plan characteristics from
es Northeast
insured states
plan with include Connecticut,
prescription drug coverage. The bottom panel contains state level descriptive statistics. An observation is a state. All
2009. An observation
from fully-insured is a member
Employee of a fully
Sponsored Insurance Plans with prescription drug coverage. P-values for a t-test of the null hypothesis that
prices and plan characteristics
are in brackets. P-values for theare
middle
drawnpanel are not reported because
the group mean is equal to Maine’s mean
they are all essentially zero.
:
also shown in Table I. The descriptive statistics presented in Table I show that
Maine is different from the average state in each of the three groups of
comparison states. Maine has a relatively small population, about 1.3 million in
2009, has a disproportionately elderly population, and has a lower median
income, though only the share older than 60 is significantly different from other
regions at conventional levels. In the next section, we will use some of these
demographic controls in the difference in difference estimation and in building
a synthetic control for Maine.
V. THE EFFECT OF MAINE’S ANY WILLING PROVIDER REGULATION ON

NEGOTIATED PHARMACEUTICAL PRICES
This section presents our main empirical results. We first estimate the effect of
Maine’s AWP law on drug prices using a difference in difference estimator
with various sets of states as the comparison group for Maine. We follow that
with an analysis using the synthetic control method.
V(i). Difference in Difference Model

To identify the causal impact of the regulation on prices paid to retail
pharmacies, we estimate state-by-quarter difference in difference regressions of
the following form:
𝟙 𝟙
(3) logpist =𝛽 {s=ME}s × Postt +𝛼s +𝛾it +𝜖ist
where the variable pist is the price for drug i in state s in quarter t as defined in
Equation 2. The variable Postt is an indicator equal to one for each quarter
beginning in and after January of 2011 and zero otherwise. State fixed effects
𝛼s allow the level of drug price levels to vary freely across states, drug- quarter-
year fixed effects 𝛾it allow flexible drug-specific changes in prices over time,
and the error term 𝜖ist is assumed to be uncorrelated with other unobserved
determinants of drug prices. We expand on the model of Equation 3 by adding
state level, time-varying covariates plausibly correlated with pharmaceutical
prices including population, the fraction of the population aged 60 or older, the
poverty rate, the child poverty rate, average weekly pharmacy worker earnings,
and annual income. Standard errors are clustered by drug. 23 Finally, we estimate
Equation 3 both without weighting and by weighting by the annual number of
prescriptions written for a given drug i in our estimation sample.
The key coefficient of interest is β, which is the difference in difference
estimate of the effect of the AWP regulation. The coefficient is identified by the
23 We have also estimated standard errors where we cluster by state or by using two-way
clustering where we cluster by drug and state. We have reported the results clustered by state
because they tend to be the largest, and are most conservative. Standard error estimates clustered
by state or drug/state are in an online appendix available at the Journal’s editorial web site.
difference in the change in (log) drug prices paid by fully-insured plans in
Maine and the change in fully-insured prices in other, comparison states. 24 The
key assumption necessary for this to identify the impact of the regulation is that
the proportional change in drug prices in Maine would not have been different
from the average change in other states had the regulation not been enacted. We
present two types of evidence in order to explore the validity of that
assumption. First, we estimate an event study that allows prices to evolve
differently in Maine relative to other states freely over the sample period.
Second, we explore the sensitivity of our estimates to several sets of
comparison states.
The event study is constructed by first fitting the following equation to the
data using ordinary least squares where we weight by the annual number of
prescriptions for a drug i:
(4) ME}s ×𝟙{t=k}t +𝛼s +𝛾it +𝜖ist

k=2
where 𝟙{t = k}t is an indicator if the observation is from the kth quarter in our
data. The first quarter of 2009 is the base period, normalized to zero, and the
event study is constructed by plotting the 𝛽̂k coefficients against time.
Inspecting the figure allows us to examine any ‘pre-trend’ that would raise
concerns about identification and also to determine exactly when the regulation
had any impact. This is particularly important as the regulation was written to
take effect at the earliest of two dates: 1) the start date of the first new contract
after July of 2010 and 2) July of 2011.
Figure 2 displays estimates of the impact of Maine’s AWP regulation on
prices over a period of three years and six months after the law was enacted.
The graph is obtained by estimating Equation 4 and plotting the estimated
𝛽k’s. Figures 3 and 4 display estimates produced by estimating Equation 4
separately for generic and branded drugs, respectively.
A clear pattern emerges from Figure 2. First, prior to enactment of Maine’s
law, trends in pharmaceutical prices paid to pharmacies in Maine were, on
average, not very different than in other states. Relative prices in Maine also
remained stable for the first six months after the law was enacted, increased
sharply in January of 2011, then dropped in 2012, all
24 In preliminary work we explored using the self-insured in Maine as a comparison group as

well as the self-insured across in states to construct difference in difference in differences
estimators. While this produced qualitatively similar results, they were much larger in magnitude
and driven primarily by a drop in prices paid by self-insured plans in Maine concurrent with
passage of the AWP regulation. We view this as more consistent with a change in the type of plan
(narrow vs. full network) than a change in the price of the same insurance product. For this reason,
we do not report these results, but they are available upon request.
Figure 2
All Drugs Event Study: Maine vs. All Other States
Notes: The log price of a drug was regressed on state fixed effects, year/quarter fixed effects
interacted with drug fixed effects, and year/quarter fixed effects interacted with a Maine dummy
variable, weighting by the drugs annual number of prescriptions. The graph contains OLS estimates
of the coefficients on the Maine/year/quarter indicator interactions and their corresponding 95%
confidence intervals. The coefficients were normalized so that the effect in on the Maine/2009/Q1
indicator is zero. The price data used in the regression are aggregated to the state/quarter/drug level
and are derived from the claims of members of fully insured prescription drug plans from the
District of Columbia and each state except for Hawaii for each quarter from 2009 through 2013.
[Colour figure can be viewed at wileyonlinelibrary.com]
gauged relative to prices of the comparison states. Figure 3 shows that this
pattern is amplified for generic drugs, while Figure 4 shows a slight decrease in
prices of branded drugs.
We quantify the magnitude of the price increase and perform inference by
estimating Equation 3. Based on the results of the event study, we define Postt
in Equation 3 to equal one beginning in the first quarter of 2011, and zero
beforehand. The results are presented in Table II. Panel A contains the results
for all drugs, Panel B for generic drugs, and Panel C for branded drugs. The
estimated price impact of Maine’s AWP law varies dramatically for the all drug
and generic drug samples depending on whether the observations are weighted
by prescriptions. For example, for the all drug sample, the estimated price
impact of the AWP law is essentially zero without weighting when using all
U.S. states in the comparison group (columns 1-3 in the first row of Panel A).
By contrast, when weighting by the number of prescriptions written for a drug,
the estimated price effect is both
Figure 3
Generic Drugs Event Study: Maine vs. All Other States
variable, weighting by the drugs annual number of prescriptions. The graph contains OLS estimates
of the coefficients on the Maine/year/quarter indicator interactions and their corresponding 95%
confidence intervals. The coefficients were normalized so that the effect in on the Maine/2009/Q1
indicator is zero. The price data used in the regression are aggregated to the state/quarter/drug level
and are derived from the claims of members of fully insured prescription drug plans from the
District of Columbia and each state except for Hawaii for each quarter from 2009 through 2013.
[Colour figure can be viewed at wileyonlinelibrary.com]
economically and statistically significant. Column 1 shows that prices rose by

about 4.7 per cent in Maine relative to other states. The difference in difference
estimate falls slightly to 3.4 per cent once controls are added, and increases to
4.1 per cent after observations from 2010 are dropped from the estimation
sample, as expected given the event study in Figure 2. 25 Columns 1-3 in Panel B
display a similar pattern for a sample including only generic drugs. Finally, by
comparing the results from the branded sample (Panel C) and the generic
sample, we see that the impact of the AWP law is concentrated on generic
drugs, and that generic prices rose by about 4−6 per cent. Branded drugs appear
to have decreased slightly in price, by roughly 2.5 per cent, and are statistically
significant. In addition, these estimates appear to be unaffected by weighting.
25 Because the inclusion of controls affects our estimates, we include these controls in all
subsequent regressions.
Figure 4
Branded Drugs Event Study: Maine vs. All Other States
variable, weighting by the drug’s annual number of prescriptions. The graph contains OLS
estimates of the coefficients on the Maine/year/quarter indicator interactions and their
corresponding 95% confidence intervals. The coefficients were normalized so that the effect in on
the Maine/2009/Q1 indicator is zero. The price data used in the regression are aggregated to the
state/quarter/drug level and are derived from the claims of members of fully insured prescription
drug plans from the District of Columbia and each state except for Hawaii for each quarter from
2009 through 2013. [Colour figure can be viewed at wileyonlinelibrary.com]
In columns 4-6 of Table II, we explore the sensitivity of the difference in

difference estimates to three other comparison groups: states with an AWP
regulation in place, states without an AWP regulation, and other states from the
Northeast.26 The estimates for the all drug and generic drug sample are similar
when states with and without AWP regulations are used as the comparison
group (columns 4 and 5), however, they more than double when using the
Northeastern states as the control (column 6). By contrast, the results for
branded drugs are largely unaffected by the choice of comparison group.
The results in Table II showed that the estimated impact of the AWP law on
drug prices varied considerably by drug type. Generic drugs experienced a
economically significant increase in price, while branded drugs decreased
slightly. Moreover, by comparing the weighted and unweighted results for
table ii
26 These states include New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island and
New York.
Difference in Differences estimates of tHe effect of awp on prices
(1) (2) (3) (4) (5) (6)
Panel A: All Drugs Unweighted
𝟙{s = ME}s 0.008

0.001 0.028
−0.003 −0.001 −0.002
×𝟙{t ≥Q12011}t (0.005) (0.006) (0.006) (0.006) (0.006) (0.007)
Prescription Weighted
𝟙{s=ME}s 0.047
0.034 0.041 0.041 0.036 0.103
×𝟙{t≥Q12011}t (0.012) (0.013) (0.014) (0.014) (0.013) (0.017)
Obs 1,565,437 1,565,437 1,248,438 857,323 738,740 195,827
Panel B: Generic Drugs Unweighted
𝟙{s = ME}s 0.025

0.008 0.012 0.013 0.012 0.062
×𝟙{t ≥Q12011}t (0.008) (0.009) (0.010) (0.010) (0.009) (0.011)
𝟙{s = ME}s 0.061

0.045 0.053 0.051 0.048 0.135
×𝟙{t ≥Q12011}t (0.015) (0.016) (0.018) (0.017) (0.016) (0.020)
Obs 873,250 873,250 700,469 480,014 411,452 113,618
Panel C: Branded Drugs Unweighte d
𝟙{s = ME}s −0.021 −0.025

(0.005)
−0.024 −0.029 −0.020 −0.031
×𝟙{t ≥Q12011}t (0.005) (0.007) (0.006) (0.005) (0.006)
𝟙{s = ME}s
−0.022 −0.025 −0.026 −0.025 −0.024 −0.029
×𝟙{t ≥Q12011}t (0.004) (0.005) (0.006) (0.006) (0.004) (0.006)
Obs 692,187 692,187 547,969 377,309 327,288 82,209
Included Drugs Top 1000 Top 1000 Top 1000 Top 1000 Top 1000 Top 1000
Control States All States All States All States AWP States Non-AWP N.E. States
States
Covariates No Yes Yes Yes Yes Yes
Drop 2010 No No Yes No No No
Notes: The dependent variable is the log price of a drug in a state quarter. All regressions include state fixed
effects and year/quarter fixed effects interacted with drug fixed effects. The data used to derive these estimates
come from prescription drug claims from members of fully insured plans residing in the District of Columbia and
all 50 states except for Hawaii from 2009 through 2013, except for those presented in the third column of each
panel which exclude observations from 2010. Covariates include the fraction of the state population aged 60 or
older, the poverty rate, the child poverty rate, average weekly retail earnings of pharmacy employees, and income.
There are 27 states with either an AWP or FOC regulation targeting pharmacies and 22 states that do not have a
regulation. Northeast states include Connecticut, New Hampshire, New York, Massachusetts, Rhode Island and
Vermont. Standard errors clustered by drug are in parentheses.
generic drugs, we see that relatively frequently consumed drugs experienced
more of a price increase than infrequently prescribed drugs. To explore this
difference, we have estimated Equation 3 separately for the 50, 100, 250, 500,
table iii
sensitivity to nUmber of DrUgs in sample
(1) (2) (3) (4) (5)
Panel A: All Drugs Unweighted

𝟙{s = ME}s
0.025 0.022 0.003
−0.004 −0.003
×𝟙{t ≥Q12011}t (0.019) (0.014) (0.009) (0.007) (0.006)
𝟙{s = ME}s
0.058 0.055 0.041 0.035 0.034
×𝟙{t ≥Q12011}t (0.025) (0.020) (0.016) (0.014) (0.013)
Obs 98,712 195,744 474,676 897,771 1,565,437
Panel B: Generic Drugs Un weighted
𝟙{s = ME}s 0.083

(0.035) 0.072 0.033 0.017 0.008
×𝟙{t ≥Q12011}t (0.025) (0.017) (0.012) (0.009)
𝟙{s = ME}s
0.079 0.075 0.056 0.047 0.045
×𝟙{t ≥Q12011}t (0.032) (0.026) (0.020) (0.017) (0.016)
Obs 49,956 99,567 245,212 476,548 873,250
Panel A: Branded Drugs Un weighted
−0.032
𝟙{s = ME}s (0.009)
−0.027 −0.028 −0.030 −0.025
×𝟙{t≥Q12011}t (0.008) (0.006) (0.005) (0.005)
𝟙{s=ME}s
−0.023 −0.022 −0.024 −0.026 −0.025
×𝟙{t ≥Q12011}t (0.008) (0.007) (0.005) (0.005) (0.005)
Obs 48,756 96,177 229,464 421,223 692,187
Included Drugs Top 50 Top 100 Top 250 Top 500 Top 1000
Covariates Yes Yes Yes Yes Yes
Notes: The dependent variable is the log price of a drug in a state quarter. All regressions include state fixed
effects and year/quarter fixed effects interacted with drug fixed effects. The data used to derive these estimates
come from prescription drug claims from members of fully insured plans residing in the District of Columbia and
all 50 states except for Hawaii from 2009 through 2013. Covariates include the fraction of the state population
aged 60 or older, the poverty rate, the child poverty rate, average weekly retail earnings of pharmacy employees,
and income. Standard errors clustered by drug are in parentheses. and 1,000 most frequently
prescribed drugs.27 The results appear in Table III. In Panel 2, we see that the
estimated effect of the AWP law on generic drug prices does not appear to be
affected by weighting for a sample composed of either the 50 or 100 most
frequently prescribed drugs (columns 1 and 2), with prices estimated to increase
between 7.5 and 8 per cent. However, when the
sample begins to include less frequently prescribed generic drugs, the weighted
and unweighted results diverge. For example, the sample includes the 250 most
frequently prescribed drugs, the unweighted estimated effect of the law drops to
3.3 per cent while the weighted estimate is about 5.6 per cent. Again, the results
for branded drugs (Panel C) appear to be unrelated to the relative popularity of
the drug. Because pharmacies are paid for each prescription they fill, we think
that the results from the weighted regression more appropriately measure the
price impact of Maine’s AWP law on the price of the typical prescription
purchased by consumers rather than those that weight all drugs equally.
We next consider how different demand and supply conditions facing
pharmacies may have affected the manner in which Maine’s AWP law affected
drug prices. It is possible that prior to the passage of Maine’s AWP law, rural
and urban pharmacies faced different competitive conditions. Isolated rural
pharmacies, for example, might have been able to command higher
reimbursements from insurers than pharmacies in more densely populated (and
presumably more competitive) urban areas. To explore this possibility, we first
compare how drug prices in relatively rural (non-CBSA) regions change
relative to more urban (CBSA) regions following the passage of Maine’s AWP
law.28 Specifically, for each state/quarter we calculated the price of each drug
for CBSA and non-CBSA regions. 29 We then estimate a variant of Equation 3
that also includes interactions of all of the control variables with an indicator
for whether the price corresponds to a non-CBSA. These interactions allow
drug prices to vary flexibly between more rural and urban environments. The
results are shown in specification (1) of Table IV estimated separately for all
drugs, branded drugs, and generic drugs. The results show that when not
weighting, prices increased by about 2% more in non-CBSA regions in Maine
relative to CBSA regions for both branded and generic drugs. However, when
weighting by prescription counts, the estimated effect changes sign and
becomes statistically insignificant. Thus, while our designation of rural and
urban areas is coarse, we conclude that there is little evidence that Maine’s
27 The top 50, 100, 250, 500, and 1,000 drugs account for approximately 41 %, 58 %, 80%,
93%, and 99% of generic drug prescriptions and 47%, 64%, 85%, 95%, and 99% of branded drug
prescriptions for orally consumed drugs in our sample.
28 HCCI reports a member’s location at a high level of aggregation to ensure members’
anonymity. The finest geographic region reported in the HCCI data is a Core-Based-Statistical-
Area (CBSA). If a member does not live in a CBSA or lives in a CBSA with too few other
members, they are reported as being in a non-CBSA.
29 Because not all drugs (especially infrequently prescribed drugs) are observed in both CBSA
and non-CBSA’s within a state/quarter the number of observations does not quite double when
changing the unit of observation to a CBSA/Drug/State/Quarter.
AWP law disproportionately affected prescription prices in urban and rural
markets, perhaps due to many rural pharmacies’ belonging to chains that are
present in both rural and urban settings.
Previous research has found that drug stores may charge higher markups for
drugs treating acute conditions than for chronic conditions, presumably because
consumers have more of an ability to search for drugs treating chronic
t able iv
D ifferential i mpact of awp l aw on D ifferent t ypes of D r U gs an D n on -cbsa r egions
All Drugs Branded Drugs Generic Drugs
(1) (2) (1) (2) (1) (2) (3)
Panel A: Unweighted
𝟙{ s = ≥ME } s −0.006 −0.003 −0.032 −0.026 0.006 0.010 0.009
× 𝟙{ t Q12011 } t (0.006) (0.006) (0.005) (0.006) (0.010) (0.010) (0.010)

𝟙{ s = ≥ME } s 0.019 0.017 0.018
× 𝟙{ t Q12011 } t (0.006) (0.009) (0.008)
× 𝟙{ IfNotCBSA }s
𝟙{ s = ≥ME } s −0.000 0.014 −0.011
× 𝟙{ t Q12011 } t (0.015) (0.019) (0.021)
× 𝟙{ IfAntiinfective } i
𝟙{ s = ≥ME } s −0.015
× 𝟙{ t Q12011 } t (0.020)
× 𝟙{ IfSole-Sourced } i
30
t able iv (continUeD)
All Branded Generic
(1 Drugs (2 (1Drugs (2 (1 Drugs(2 (3
Panel B: Prescription ) ) ) ) ) ) )
{s=M
�Weighted
≥ }s 0.0 0.0 −0.0 −0.0 0.0 0.0 0.0
�×�{t EQ120}t (0.01
43 (0.01
32 (0.00
22 (0.00
22 (0.01
55 (0.01
47 (0.01
49
�{s=M
� ≥ 11}s −0.0
4) 5) −0.0
5) 5) −0.0
7) 9) 7)
�×�{t EQ120}t (0.00
06 (0.00
01 (0.01
08
×� 11 }s
�{IfNotCBSA 8) 6) 1)
�{s=M
� ≥ }s 0.0 0.0 −0.0
�×�{t E Q120 }t (0.02
15 (0.02
61 (0.03
04
×� 11 }i
�{IfAntiinfecti 7) 9) 0)
�{s=M
� ve
≥ }s −0.0
�×�{t EQ120}t (0.02
77
×� 11
�{IfSole- }i 3)
Included
� Sourced Top Top Top Top Top Top Top
Covariat
Drugs Ye
1000 Ye
1000 Ye
1000 Ye
1000 Ye
1000 Ye
1000 Ye
1000
Ob
es 2,492,9
s 1,565,4
s 1,018,0
s 692,1
s 1,474,9
s 873,2
s 873,2
s
Not
s The dependent variable
92 is the37 drug. The unit
log price of a82 87of observation
10 is a drug/state/CBSA
50 50indicator/quarter for columns 1, 3,
state/quarter for
unitcolumns 2, 4, 6, and
of observation 7. These regressions examine how the impact of the AWP law varies in non-CBSA regions and for
is a drug/
es
sole-sourced
and 5. Thegenerics). All regressions include state fixed effects, year/quarter fixed effects interacted with drug fixed effects, and
different
in the regression drugs
types ofare (anti-infectives
fully interacted with andan indicator for the variable of interest in the regression (Non-CBSA, Anti-Infective, Sole-
covariates.
the state population control
All of the aged 60variables
or older, included
Sourced). Covariates include the fraction
theofpoverty rate, the child poverty rate, average weekly retail earnings of pharmacy employees, and
estimates
. Standardcomes
errors prescription
clustered by drug drug
are claims
in from members of fully insured plans residing in the District of Columbia and all 50 states
income. The datafrom
used to derive these
except for Hawaii from 2009 through
parentheses.
2013
DANIEL HOSKEN, DAVID SCHMIDT, AND MATTHEW C. WEINBERG
:
conditions (Sorensen [2000]). If pharmacies in Maine charged different
markups for chronic and acute condition drugs prior to the passage of the law, it
is possible the passage of Maine’s AWP law could have affected these drugs
differently. To explore this possibility, we examine how the AWP law affected
the price of anti-infective drugs (typically antibiotics prescribed to treat
infections) relative to other drugs.30 To measure this differential impact, we
estimate a variant of Equation 3 that also includes the control variables
interacted with an indicator for a drug being an anti-infective which allows the
pricing behavior of anti-infective and other drugs to differ in the control states. 31
The results appear in specification (2) of Table IV estimated separately for all
drugs, branded drugs, and generic drugs. We find no significant differences in
the unweighted results (Panel A), however, branded anti-infective drugs do
experience a price increase relative to other branded drugs of about 6%.
Interestingly, the net-effect of the AWP law on branded anti-infective drugs is
about 4% (0.06 - 0.022) which is very similar to the estimated impact of
generics (about 4.5%).
Finally, we examine whether the supply conditions facing pharmacies may
affect how the AWP law affected generic drug prices. The number of
manufacturers producing different generic drugs varies substantially. Berndt,
Conti and Murphy [2017], for example, report that about 25% of drugs are
produced by five or more manufacturers, while 25% of generics are produced
by a single manufacturer. Here we examine whether the prices of drugs
produced by a single manufacturer change differently after the passage of
Maine’s AWP law than those produced by multiple manufacturers. We define a
sole-sourced generic drug i as a product (dosage
form/chemical/strength/therapeutic class) that had only a single generic firm
selling it at a point in time. 32 Again, to allow pricing to vary flexibly for sole
and multisourced drugs, we fully interact a multisource indicator with the
control variables in Equation 3. The results from this regression are shown in
specification (3) of Table IV. The results show that prices fall for sole-sourced
generic drugs after the passage of AWP laws, although the effect is only
statistically significant when weighted by prescriptions (Panel B). Interestingly,
the estimated effect of Maine’s AWP law on solesourced generics is very
similar to that of branded drugs (−.077 + .049 = −.028). Because sole-sourced
30 Anti-infective drugs include antibiotics, antifungals and antivirals that are used to treat
infections and are typically used for a sort duration. For example, most antibiotic prescriptions are
for fourteen days or fewer. https ://www.healt hline.com/healt h/how-do-antib iotics-work#length-
oftime (last accessed 7/26/2019).
31 Specifically, we interact the state indicators and the demographic control variables with the
anti-infective indicator. Because there is no variation within a drug in terms of its anti-infective
status, there is no need to interact the anti-infective indicator with the drug/time indicators (𝛾it).
32 Specifically, for each generic drug in our estimation sample, we determine if there is only a
single labeler associated with a drug at a point in time. In most cases, the labeler is the drug’s
manufacturer; however, in some circumstances the labeler could be a firm that resells a drug
produced by another manufacturer. Thus, it is possible that we are understating the fraction of sole-
sourced generic drugs in our sample.
generic drugs face similar market conditions to branded drugs (only one firm
sells that product), it is not surprising that both types of drugs are similarly
affected by Maine’s AWP law.33
V(ii). Synthetic Control Model

The difference in difference estimator is unbiased only if prices in the
comparison states evolved as prices in Maine would have in the counterfactual
world where Maine did not enact an AWP law. A concern is that the different
groups of comparison states we’ve considered may not satisfy this assumption.
While our results are qualitatively robust across the four groups of states we’ve
considered, the estimates for generic drugs do vary by a factor of three
depending on which comparison states are used, and furthermore, it is possible
that none of the comparison groups are valid. Specifically, while the event
study in Figure 3 shows that if anything, there was only a slight increase in
prices in Maine relative to the rest of the United States in the years leading up
to the regulation, there is no guarantee that all shocks to prices were common to
Maine and other states after the regulation was enacted.
In order to address these challenges as best as possible, we take a data-driven
approach to selecting a comparison group by using the synthetic control method
proposed by Abadie, Diamond and Hainmueller [2010]. Instead of attempting
to control for common time shocks by using a pre-defined set of comparison
states, the synthetic control method uses a subset of potential comparison states
that resemble Maine in terms of covariates likely to determine prescription drug
prices and actual prescription drug prices prior to the enactment of the
regulation. We use prices in the first two quarters of 2009 and 2010, the share
of the population older than 60, state population, and per capita income to
construct the ‘synthetic’ Maine.
The synthetic control method was developed to measure the treatment effect
on a single outcome variable. Maine’s AWP law may affect each of the generic
and branded drug prices we study. Thus, to implement the synthetic control
method, we must first construct a single aggregated price measure that varies by
state and quarter. We do this by constructing a price index from the underlying
data where an observation is a drug, state, quarter. The index is constructed by
fitting the following equation to the data using OLS:
33 The reimbursement that pharmacies receive for dispensing sole-sourced generic drugs is often
specified to be similar to branded drugs, and different from multi-source generic drugs. For
instance, a court decision in a lawsuit filed by the state of Mississippi against drug manufacturer
Sandoz, the court noted that reimbursement to pharmacies under the state Medicaid program was
determined by: ‘(1) the lesser of AWP [Average Wholesale Price] minus twelve per cent or
Wholesale Acquisition Cost (WAC) plus nine per cent for brand named drugs and single-source
generic drugs, and (2) AWP [Average Wholesale Price] minus twenty-five per cent for multiple-
source generic drugs.’ See IN RE: MISSISSIPPI MEDICAID PHARMACEUTICAL AVERAGE
WHOLESALE PRICE LITIGATION: Sandoz, Inc. v. State of Mississippi. No.
2012-CA-01610-SCT. Decided: October 29, 2015, available online at https ://casel aw.findl
aw.com/ ms-supre me-court/ 17170 55.html.
Figure 5
All Drug Price Index Gap between Maine and Synthetic Maine
Notes: The graph contains the difference between the estimated log price index in Maine and the
synthetic Maine in bold and the difference between the log price index and the synthetic
comparison for 47 placebo experiments, corresponding to those states that did not pass an AWP
regulation in our sample period. The estimates are based on price data drawn from the prescription
drug claims of members of fully-insured drug claims from the District of Columbia and each state
except for Hawaii, Kentucky and North Carolina for each quarter from 2009 through 2013. [Colour
(5) logpist =𝛼is +𝛿st +𝜖ist
where i indexes drug, s state, and t quarter. 𝛼is is a drug-state specific fixed
effect and 𝛿st is a state-time specific fixed effect, implemented by including a
separate indicator variable for each state/time period in the data except for the
first quarter of 2009, which is normalized to zero. We use the estimated 𝛿st as
the price index for drugs in state s during time period t. To ensure that the
estimated state-time indicators are comparable across states at a point in time,
we limit the set of drugs included in the estimation of Equation 5 to those
observed in all states within a given quarter. 34 We estimate this price
Figure 6
34 Because infrequently prescribed drugs are often unobserved in some states in a given quarter,
we also limit the set of drugs used to estimate Equation 5 to the 250 most frequently prescribed
branded and generic drugs. This restriction drops relatively unpopular drugs: in each year the
included drugs accounted for at least 80% and 85% of generic and branded drug prescriptions,
respectively
Branded Drug Price Index Gap between Maine and Synthetic Maine
Notes: The graph contains the difference between the estimated log price index in Maine and the
drug claims of members of fully-insured drug plans from the District of Columbia and each state
index separately for all drugs, generic drugs, and branded drugs and weight
observations by the number of prescriptions written for that drug in the sample
during a given quarter.35,40
We first use the synthetic control to provide graphical evidence of the impact
of the regulation by plotting the difference between the price index in Maine
and in synthetic Maine for each quarter in our sample. We then estimate the
impact of the regulation by calculating the average difference between Maine
and the synthetic Maine after the law went into effect.
Figure 7
Generic Drug Price Index Gap between Maine and Synthetic Maine
35 We have also estimated the synthetic control model using an index calculated without
weights, and find qualitatively similar results. See Figures A.1-A.3 (the analogue to Figures 5–7
which use the weighted index) in an online appendix available at the Journal’s editorial web site. 40
To examine the importance of this aggregation, we have estimated the difference-in-difference
model using the price index. The estimated price impact of Maine’s AWP law for the all drug and
generic drug samples are roughly 1.5% larger than those estimated with the drug level data
(comparing the weighted results from Table III column 3 to those in Appendix Table B.1, available
on the Journal’s editorial web site). In addition, when using the price index, branded drug prices
appear to be unaffected by Maine’s AWP law.
Notes: The graph contains the difference between the estimated log price index in Maine and in
drug claims of members of fully-insured drug plans from the District of Columbia and each state
Appendix Tables C.1 and C.2 provide exact details on how the weights were
determined and a description of those weights.36 Appendix Table C.1
demonstrates that for each specification the synthetic and actual Maine are
similar in terms of the variables used to construct the weights and also in terms
of other variables, including the average annual weekly retailing wage and the
overall and child poverty rates. This provides some validation for the method.
Appendix Table C.2 lists each state that receives weight in each specification.
Figures 5–7 plot the quarterly synthetic control estimates of the impact of
Maine’s AWP regulation on prices for all drugs, generic drugs, and branded
drugs, respectively. Each figure plots in bold the gap between the price index
for Maine minus the estimate for the synthetic Maine. Each figure also displays
47 analogously constructed placebo synthetic control estimates in grayscale. 37
One placebo estimate was constructed for each state by applying the
Figure 8
36 Appendix Tables C.1 and C.2 appear in the online appendix available on the Journal’s
editorial web site.
37 Placebo estimates for Kentucky and North Carolina could not be calculated because the
algorithm failed to converge.
Frequency Histogram of Placebo Price Changes Generated by the Synthetic Control Model: All
Drugs
Notes: The histogram plots the empirical distribution of the placebo price changes for 47 placebo
experiments, corresponding to those states that did not pass an AWP regulation in our sample
period. The figure also denotes where the synthetic control estimate of Maine’s price change falls.
The placebo price effect is defined as the mean difference between a state’s log price index and its
synthetic comparison after the law went into effect. The estimates are based on price data drawn
from the prescription drug claims of members of fully-insured drug plans from the District of
Columbia and each U.S. state except for Hawaii, Kentucky and North Carolina for each quarter
from 2009 through 2013. [Colour figure can be viewed at wileyonlinelibrary.com]
synthetic control method as if the placebo state had enacted the regulation
instead of Maine. In each case Maine was in the pool of comparisons used to
construct the synthetic control.
Figure 5 shows that prior to the regulation, the difference between the
synthetic and actual Maine is stable, even in periods where the pre-regulation
outcome was not used to construct the comparison group. Prices increased in
Maine by about 11 per cent in the January after the regulation was enacted,
possibly due to contracts being reset at the beginning of the calendar year, and
then fell slightly in 2012 but remained about 8 to 9 per cent higher than pre-
regulation levels. The initial price increase in Maine in 2010 was unusually
large, as is apparent by comparing Maine’s increase shown in bold to the
distribution of gaps in the placebo states.
Figures 6 and 7 plot the difference between the synthetic control and the
estimated price index for generic and branded drugs, respectively. Overall, the
synthetic control estimates predict that the price index for all drugs increased
Figure 9
Frequency Histogram of Placebo Price Changes Generated by the Synthetic Control Model: Generic
Drugs
by 9.1%, generic drugs increased by 10.2%, and that branded prices were
essentially unchanged (−0.13%).
We conduct inference by comparing the estimated price impact of the AWP
law on Maine’s drug prices to the distribution of placebo price effects. For each
state, we apply the synthetic control procedure, including Maine in the set of
states used to construct the placebo synthetic control. In each case the optimal
weights are calculated pre-regulation and then applied ex post. We then
calculate the change in the average price between a state and its synthetic
control after the law went into effect, and plot the frequency histogram of
placebo effects in Figures 8–10. Maine’s predicted price increase was larger
than all of the placebo effects for generic drugs and the second largest when
looking at all drugs. Unlike in the standard difference-in-difference analysis
above, the effect on Maine’s drug prices persists for years after the introduction
of the Maine AWP law. By contrast, the predicted price change
Figure 10
Frequency Histogram of Placebo Price Changes Generated by the Synthetic Control Model:
Branded Drugs
for branded drugs appears to be in the middle of the placebo distribution

suggesting that the AWP law did not change Maine’s branded drug prices.
VI. CONCLUSION
Healthcare plans routinely use financial incentives, co-pays and co-insurance,

to direct patients to preferred providers or therapies for treatment. The ability to
steer patients not only provides to healthcare plans the ability to direct patients
to relatively inexpensive providers, but also gives plans leverage to negotiate
lower provider prices. Surprisingly, given the growing interest in controlling
medical spending, there is relatively little research examining how much of an
impact restrictions on selective contracting, such as Any Willing Provider laws,
affect provider prices.
In this paper, we examine how Maine’s recently enacted AWP law affected
drug prices. We first present a simple stylized model to illustrate how the
law affects equilibrium prices. We show that, in expectation, prices with an AWP
law are higher because healthcare plans lose the ability to guarantee preferred
providers with higher market share in compensation for lowering their prices. The
model also shows that an AWP law results in larger price increases when the plans
are more willing to steer customers to low cost providers. For this reason, AWP
laws will have less of an impact on provider prices when either consumer demand
for specific providers is higher or when plans do not provide strong financial
incentives to steer consumers to preferred providers.
We then use individual prescription claims data from the Health Care Cost
Institute (HCCI) to determine how Maine’s drug prices changed following the
passage of its AWP law in 2010. We estimate the causal impact of the law by
comparing changes in drug prices paid by fully-insured plans in Maine to those in
other states using difference in difference estimators and the synthetic control
method. Using both estimation methods, we find that generic drug prices increased
significantly after the law went into effect. For branded drugs, the difference-in-
difference results showed a small price decrease while the synthetic control model
showed essentially no change in price. In addition, the estimated impact of the
AWP law on prices was larger in the initial year following the law than subsequent
years. The synthetic control method estimates a short-run impact of about 14 per
cent for generic drugs in 2011 and a smaller long-run impact of about 8-9 per cent
through the end of our sample period in the fourth quarter of 2013. A possible
explanation is that while plans may have initially faced higher prices due to the
new constraint imposed by the AWP law, eventually plan administrators
discovered alternative methods to gain leverage against pharmacies.
To put the estimated price effects above into context, it is estimated that the
average independent pharmacy recognized a gross profit margin of about 23 per
cent in 2012 (HMAO [2015]). The leeway a pharmacy has to offer a lower price in
order to join a restricted network derives from their being willing to give up some
of their margin in exchange for higher volume.
While our study has demonstrated that Maine’s AWP law increased provider
prices, we have not determined the effect of the law on consumer welfare. The
goal of AWP laws is to provide consumers with more provider choice by limiting
plans’ ability to steer members to preferred providers. If the members of fully-
insured health plans in Maine affected by the law had strong preferences for
pharmacies previously excluded from their networks, then increased provider
prices may have been partially offset by increased consumer surplus (Ho and Lee
[2019]). Unfortunately, because the HCCI data does not identify the pharmacies
accessed by members or health plans’ pharmacy networks, it is not possible to
conduct such a welfare analysis with this data.
REFERENCES
Abadie, A.; Diamond, A. and Hainmueller, J., 2010, ‘Synthetic Control Methods for
Comparative Case Studies: Estimating the Effect of California’s Tobacco Control
Program,’ Journal of the American Statistical Association, 105(490), pp. 493–505.
Berndt, E. R.; Conti, R. M. and Murphy, S. J., 2017, ‘The Landscape of U.S. Generic
Prescription Drug Markets, 2004-2016,’ working paper 23640 (National Bureau of
Economic Research, Cambridge, Massachusetts, U.S.A.).
Berndt, E. R. and Newhouse, J. P., 2012, ‘Pricing and Reimbursement in U.S.
Pharmaceutical Markets,’ In Danzon, P. M. and Nicholson, S. (eds.), The Oxford
Handbook of the Economics of the Biopharmaceutical Industry (Oxford University Press,
New York, New York, U.S.A.).
Cooper, Z.; Craig, S. V.; Gaynor, M. and Van Reenen, J., 2019,‘The Price Ain’t Right?
Hospital Prices and Health Spending on the Privately Insured,’ The Quarterly Journal of
Economics, 134(1), pp. 51–107.
Cutler, D. M.; McClellan, M. and Newhouse, J. P., 2000,‘How Does Managed Care Do It?,’
RAND Journal of Economics, 31(3), pp. 526–548.
Dafny, L.; Hendel, I. and Wilson, N., 2015,‘Narrow Networks on the Health Insurance
Exchanges: What Do They Look Like and How Do They Affect Pricing? A Case Study
of Texas,’ American Economic Review, 105(5), pp. 110–114.
Durrance, C., 2009, ‘The Impact of Pharmacy-Specific Any-Willing-Provider Legislation
on Prescription Drug Expenditures,’ Atlantic Economic Journal, 37, pp. 409–423.
Ellison, S. F. and Snyder, C. M., 2010, ‘Countervailing Power in Wholesale
Pharmaceuticals,’ The Journal of Industrial Economics, 58(1), pp. 32–53.
Ghili, S., 2018, ‘Network Formation and Bargaining in Vertical Markets: The Case of
Narrow Networks in Health Insurance,’ working paper (Yale University, New Haven,
Connecticut, U.S.A.).
Gruber, J. and McKnight, R., 2016, ‘Controlling Health Care Costs through Limited
Network Insurance Plans: Evidence from Massachusetts State Employees,’ American
Economic Journal: Economic Policy, 8(2), pp. 219–250.
HHS-OIG, 2011, ‘Review of Drug Costs to Medicaid Pharmacies and their Relation to
Benchmark Prices,’ technical report (U.S. Department of Health and Human Services,
Office of the Inspector General, Washington, D.C., U.S.A.).
HMAO, 2015, ‘Study of the Pharmacy Chain of Supply,’ technical report (Health
Management Associates and Office of the Insurance Commissioner of Washington State,
Olympia, Washington, U.S.A.).
Ho, K. and Lee, R. S., 2019,‘Equilibrium Provider Networks: Bargaining and Exclusion in
Health Care Markets,’ American Economic Review, 109(2), pp. 473–522.
Kaiser, 2014, ‘2014 Employer Health Benefits Survey,’ technical report (Henry J. Kaiser
Family Foundation, Health Research and Educational Trust, Menlo Park, California,
U.S.A.).
Kaiser, 2017, ‘2017 Employer Health Benefits Survey,’ technical report (Henry J. Kaiser
Family Foundation, Health Research and Educational Trust, Menlo Park, California,
U.S.A.).
Klick, J. and Wright, J. D., 2015, ‘The Effect of Any Willing Provider and Freedom of
Choice Laws on Prescription Drug Expenditures,’ American Law and Economics Review,
17(1), pp. 192–213.
Lakdawalla, D. and Yin, W., 2015, ‘Insurers’ Negotiating Leverage and the External Effects
of Medicare Part D, ’ The Review of Economics and Statistics, 97(2), pp. 314–331.
Liebman, E., 2018, ‘Bargaining in Markets with Exclusion: An Analysis of Health

Insurance Networks,’ working paper (Terry College of Business at the University of
Georgia, Athens, Georgia, U.S.A.).
Marsteller, J.; Bovbjerg, R.; Nichols, L. and Verrilli, D. K., 1997,‘The Resurgence of
Selective Contracting Restrictions,’ Journal of Health Politics, Policy and Law, 22, pp.
1133–1189.
PBMI, 2016, ‘2016 Trends in Drug Benefit Design Report,’ technical report (Pharmacy
Benefit Management Institute, Plano, Texas, U.S.A.).
Sorensen, A. T., 2000,‘Equilibrium Price Dispersion in Retail Markets for Prescription
Drugs,’ Journal of Political Economy, 108(4), pp. 833–850.
Sorensen, A. T., 2003,‘Insurer-Hospital Bargaining: Negotiated Discounts in
PostDeregulation Connecticut,’ The Journal of Industrial Economics, 51(4), pp. 469–
490.
Starc, A. and Swanson, A., 2018, ‘Preferred Pharmacy Networks and Drug Costs,’ working
paper 24862 (National Bureau of Economic Research, Cambridge, Massachusetts,
U.S.A.).
Tenn, S. and Wendling, B. W., 2014,‘Entry Threats and Pricing in the Generic Drug
Industry,’ The Review of Economics and Statistics, 96(2), pp. 214–228.
Town, R. and Vistnes, G., 2001,‘Hospital Competition in HMO Networks,’ Journal of
Health Economics, 20(5), pp. 733–753.
Trompeter, E. and Brown, J., 2014, ‘Narrow Network Strategies and Trends for Health
Plans and PBM’s,’ technical report (Atlantic Information Services, 17th street NW,
Washington, D.C., U.S.A.).
Vita, M. G., 2001,‘Regulatory Restrictions on Selective Contracting: An Empirical Analysis
of “Any-Willing-Provider” Regulations,’ Journal of Health Economics, 20(6), pp. 955–
966.
SUPPORTING INFORMATION
Additional supporting information may be found in the online version of this article at
http://wileyonlinelibrary.com/journal/joie or via the Journal’s website. http://www.jindec.org

The Journal of Industrial Economics 0022-1821 Volume LXVIII March 2020 No. 1

Uploaded by

Copyright:

Available Formats

You might also like

The Journal of Industrial Economics 0022-1821 Volume LXVIII March 2020 No. 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Journal of Industrial Economics 0022-1821 Volume LXVIII March 2020 No. 1

Uploaded by

Copyright:

Available Formats

THE JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821

Volume LXVIII March 2020 No. 1

ANY WILLING PROVIDER AND NEGOTIATED RETAIL

Any Willing Provider (AWP) regulations require insurers to allow

II. INSTITUTIONAL BACKGROUND

is only required that pharmacies be allowed to participate in the process of

III. AN ILLUSTRATIVE MODEL

III(i). The Auction Model without AWP

As in Sorensen [2003], the equilibrium bid function can be shown to be b(ci)

III(ii). Posted Price Model under AWP

Total Prescription Revenue

Total Prescription Revenue in Equation 2 is defined as the sum of the payment

(1) (2) (3) (4) (5)

All Other States without States with Northeastern

Price Measures Maine States AWP AWP States

Price Per Pill 3.14 3.20 3.18 3.22 3.22

PPO or POS 0.66 0.63 0.59 0.69 0.70

V. THE EFFECT OF MAINE’S ANY WILLING PROVIDER REGULATION ON

V(i). Difference in Difference Model

(4) ME}s ×𝟙{t=k}t +𝛼s +𝛾it +𝜖ist

24 In preliminary work we explored using the self-insured in Maine as a comparison group as

economically and statistically significant. Column 1 shows that prices rose by

In columns 4-6 of Table II, we explore the sensitivity of the difference in

Panel A: All Drugs Unweighted

𝟙{s = ME}s 0.008

𝟙{s = ME}s 0.025

𝟙{s = ME}s 0.061

𝟙{s = ME}s −0.021 −0.025

Panel A: All Drugs Unweighted

𝟙{s = ME}s 0.083

All Drugs Branded Drugs Generic Drugs

(1) (2) (1) (2) (1) (2) (3)

× 𝟙{ t Q12011 } t (0.006) (0.006) (0.005) (0.006) (0.010) (0.010) (0.010)

× 𝟙{ t Q12011 } t (0.015) (0.019) (0.021)

V(ii). Synthetic Control Model

(5) logpist =𝛼is +𝛿st +𝜖ist

for branded drugs appears to be in the middle of the placebo distribution

Healthcare plans routinely use financial incentives, co-pays and co-insurance,

Liebman, E., 2018, ‘Bargaining in Markets with Exclusion: An Analysis of Health

You might also like