Ending Pay for PBM Performance: Consequences for Prescription Drug Prices, Utilization, and Government Spending

22 Pages Posted: 13 Sep 2023

See all articles by Casey B. Mulligan

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 11, 2023

Abstract

Proposed “delinking” legislation would prohibit Pharmacy Benefit Managers (PBMs) from being remunerated based on the rebates and discounts they negotiate for drug insurance plans serving Medicare beneficiaries. This policy would significantly change drug pricing and utilization and shift billions of dollars annually from patients and taxpayers to drug manufacturers and retail pharmacy companies. Annual federal spending on Medicare Part D premiums would increase $3 billion to $10 billion plus any concomitant increase in Medicare subsidies for out-of-pocket expenses. All of these consequences stem from the fact that PBMs are hired to obtain rebates and discounts but would no longer be compensated based on their results. The quantitative estimates utilize a large body of economic research showing how much “pay for performance” matters for economic outcomes. The price-theoretic models also account for various market frictions and imperfections including market power, coordination costs, tax distortions, and incomplete innovation incentives.

JEL Classification: D43, D71, I13, J24, L14, L51

Suggested Citation

Mulligan, Casey B., Ending Pay for PBM Performance: Consequences for Prescription Drug Prices, Utilization, and Government Spending (September 11, 2023). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-124, Available at SSRN: https://ssrn.com/abstract=4569537 or http://dx.doi.org/10.2139/ssrn.4569537

Casey B. Mulligan (Contact Author)

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