Preferred Pharmacy Networks and Drug Costs

56 Pages Posted: 13 Sep 2018

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 2018


Selective contracting is a popular tool for reducing health care costs, but these savings must be weighed against consumer surplus losses from restricted access. In public and private prescription drug plans, issuers utilize preferred pharmacy networks to reduce drug prices. We show that, in the Medicare Part D program, drug plans with restrictive preferred pharmacy networks pay lower retail drug prices; however, enrollee insensitivity to preferred pharmacy copay discounts leads to higher prices. We then estimate plan and pharmacy demand models to quantify the costs and benefits of selective contracting with heterogeneous enrollee sensitivity to benefit design.

JEL Classification: I13, L1

Suggested Citation

Starc, Amanda and Swanson, Ashley, Preferred Pharmacy Networks and Drug Costs (August 19, 2018). 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)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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