Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market

67 Pages Posted: 3 Jun 2021 Last revised: 15 Jun 2022

See all articles by Rena Conti

Rena Conti

University of Chicago

Brigham R. Frandsen

Brigham Young University - Department of Economics

Michael Powell

Northwestern University - Kellogg School of Management

James B. Rebitzer

Boston University School of Management; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: May 2021

Abstract

A small number of pharmacy benefit managers (PBMs) dominate the market for branded pharmaceuticals in the United States, but they are controversial, and their economic significance is poorly understood. Large PBMs are market intermediaries. They are also a common agent operating formularies on behalf of various third-party payers. We present a model that captures these dual roles and also clarifies the economics of drug rebates. We find that PBM-run formularies enhance the efficiency of drug markets, but when PBMs are highly concentrated these gains accrue to PBMs rather than consumers or drug makers. We also identify threats to formulary efficiency including most favored nation agreements between drug makers and PBMs and the strategic setting of high list prices by drug makers. Our model also offers insights into current market structures and a framework for assessing market reforms.

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Suggested Citation

Conti, Rena and Frandsen, Brigham R. and Powell, Michael and Rebitzer, James B., Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market (May 2021). NBER Working Paper No. w28866, Available at SSRN: https://ssrn.com/abstract=3859111

Rena Conti (Contact Author)

University of Chicago ( email )

Brigham R. Frandsen

Brigham Young University - Department of Economics ( email )

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Michael Powell

Northwestern University - Kellogg School of Management ( email )

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James B. Rebitzer

Boston University School of Management ( email )

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IZA Institute of Labor Economics

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