Working Paper: NBER ID: w28866
Authors: Rena M. Conti; Brigham Frandsen; Michael L. Powell; James B. Rebitzer
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.
Keywords: Pharmacy Benefit Managers; Prescription Drugs; Market Efficiency; Rebates; Drug Pricing
JEL Codes: I11; I12; L1; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PBM-run formularies (H51) | market efficiency (G14) |
| concentration of PBMs (L65) | consumer welfare (D69) |
| MFN agreements (F13) | market efficiency (G14) |
| strategic pricing by drug makers (D49) | formulary efficiency (D61) |