Preferred Pharmacy Networks and Drug Costs

69 Pages Posted: 13 Sep 2018 Last revised: 7 Jan 2020

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2019


Selective contracting is an increasingly popular tool for reducing healthcare costs, but any savings must be weighed against consumer surplus losses from restricted access. Recently, many prescription drug plans utilize preferred pharmacy networks to reduce drug prices. Our results suggest that Medicare Part D plans with preferred pharmacy networks pay lower retail drug prices, while subsidized enrollees' insensitivity to preferred pharmacy cost-sharing discounts reduces these savings. We then estimate pharmacy demand models to quantify the costs and benefits of preferred pharmacy networks, finding that the average enrollee benefits from preferred pharmacy contracting, due to reduced out-of-pocket costs at preferred pharmacies.

JEL Classification: I13, L1

Suggested Citation

Starc, Amanda and Swanson, Ashley, Preferred Pharmacy Networks and Drug Costs (October 7, 2019). Available at SSRN: or

Amanda Starc

Kellogg School of Management, Northweste ( email )

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

Ashley Swanson (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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