Preferred Pharmacy Networks and Drug Costs

54 Pages Posted: 1 Aug 2018

Multiple version iconThere are 2 versions of this paper

Date Written: July 2018


Selective contracting is an increasingly popular tool for reducing health care costs, but these savings must be weighed against consumer surplus losses from restricted access. In both public and private prescription drug insurance plans, issuers utilize preferred pharmacy networks to reduce drug prices. We show that, in the Medicare Part D program, drug plans with more restrictive preferred pharmacy networks, and plans with fewer enrollees who are insensitive to preferred pharmacy discounts on copays, pay lower retail drug prices. We then use estimates of plan and pharmacy demand to estimate the first-order costs and benefits of selective contracting in the presence of enrollees with heterogeneous sensitivity to preferred supplier incentives.

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Suggested Citation

Starc, Amanda and Swanson, Ashley, Preferred Pharmacy Networks and Drug Costs (July 2018). NBER Working Paper No. w24862. Available at SSRN:

Amanda Starc (Contact Author)

Kellogg School of Management, Northweste ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
3303382067 (Phone)

Ashley Swanson

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

NBER ( email )

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Cambridge, MA 02138
United States

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