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

69 Pages Posted: 28 Jan 2019 Last revised: 30 Apr 2020

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

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

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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