Pricing Intermediaries in Prescription Drug Markets: To Leverage or Replace?
69 Pages Posted: 28 Jan 2019 Last revised: 30 Apr 2020
Date Written: March 5, 2019
This article assesses the price-negotiation role played by Pharmacy Benefit Managers (PBMs), which have been at the heart of the recent prescription drug pricing debate. I start by compiling novel data on the net-of-rebate prices of anti-cholesterol drugs. These prices are then used to estimate a dynamic model of drug pricing that involves PBMs and drug companies. Counterfactuals show that PBMs reduce overall spending by 15% without greatly reducing patient access, likely increasing short-run welfare. However, they reduce drug company profits by 25%, potentially dampening innovation incentives.
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: Suggested Citation