Bitter Pills to Swallow: the Enforcement Costs of Health Litigation

Abstract

Public health procurement is shaped not only by administrative choices but also by judicial decisions that enforce the law on public buyer units. Judicial enforcement is costly for two reasons. First, as mandatory purchases are invariably urgent, judicial enforcement undermines procurement planning. Second, as judicial sanctions for noncompliance are severe, auctioneers have higher incentives to maximize tender success at the expense of higher prices, which we call the “under the gun” effect. Unique data on health litigation and procurement of prescription and nonprescription drugs allow us to estimate the overall enforcement costs and the “under the gun” effect. Judicial enforcement implies (i) higher negotiated prices (from 30.73% to 44.37%), (ii) fewer participant firms (from 28.63% to 32.21%), (iii) fewer bids (from 39.40% to 45.93%), and (iv) a lower probability of success (from 38.56% to 48.66%) in urgent tenders in comparison with ordinary tenders. To estimate the “under the gun” effect, we utilize urgent administrative tenders that are not subject to judicial sanctions. We estimate that judicial sanctions increase prices between 8.83% and 9.97%. Thus, judicial enforcement compels the executive branch to carry out the purchases, which generates high costs to the public budget. These results suggest that judges should consider the social costs associated with enforcing court decisions when the judiciary acts as a policymaker.