Pricing Intermediaries in Prescription Drug Markets: To Leverage or Replace?

64 Pages Posted: 28 Jan 2019 Last revised: 12 Jul 2019

See all articles by Josh Feng

Josh Feng

University of Utah - David Eccles School of Business; National Bureau of Economic Research

Date Written: March 5, 2019

Abstract

I address the debate over whether Pharmacy Benefit Managers (PBMs) are effective at controlling prescription drug prices. First, I collect data on the average negotiated prices of anti-cholesterol drugs to better measure PBM-influenced outcomes. Second, I embed PBM formulary design and price negotiation in a dynamic oligopoly model of drug pricing, and estimate the model using the negotiated price data. Compared to outcomes under a pricing structure without negotiation, PBMs reduce overall spending by 15%. This is the net result of a 25% decrease in drug company revenues and PBMs capturing part of the savings. PBMs achieve this by leveraging credible threats of restrictive formularies, without actually having to greatly limit patient access in equilibrium. My results speak to competing Medicare drug policy proposals that aim to either leverage or replace PBMs.

Keywords: Drug Pricing, Pharmacy Benefit Managers, Formulary Design, Medicare Part B, Medicare Part D, Dynamic Games, Dynamic Pricing, Consumer Inertia

JEL Classification: L11, L65, I11, I13, H51

Suggested Citation

Feng, Josh, Pricing Intermediaries in Prescription Drug Markets: To Leverage or Replace? (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3316430 or http://dx.doi.org/10.2139/ssrn.3316430

Josh Feng (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
2016977982 (Phone)

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