Working Paper: NBER ID: w27563
Authors: Leila Agha; Soomi Kim; Danielle Li
Abstract: This paper studies how insurance coverage policies impact pharmaceutical innovation. In the United States, most patients obtain prescription drugs through insurance plans administered by Pharmacy Benefit Managers (PBMs). Beginning in 2012, PBMs began excluding coverage for many newly approved drugs when cheaper alternatives were available. Relative to firms’ existing practices, we show that exclusions substantially reduced insurance claims for targeted drugs, lowering their profitability. This new risk of coverage exclusion reshaped upstream pharmaceutical R&D: for every 1 standard deviation increase in drug class exclusion risk, we estimate an 11% decline in subsequent development activity. This change translated into a relative decline in the development of drug candidates that appear more incremental: that is, those in drug classes with more pre-existing therapies and with less scientifically novel research.
Keywords: insurance design; pharmaceutical innovation; PBMs; R&D; drug coverage
JEL Codes: I11; O31; O32; O33; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Drug class exclusion risk (Z28) | R&D activity (O32) |
| Closed formularies (Y20) | R&D investments (O32) |
| Drug class exclusion risk (Z28) | New drug candidates (L65) |
| High exclusion risk (G52) | R&D activity in earlier-stage drugs (O32) |
| High exclusion risk (G52) | Overall development of drugs (L65) |