Working Paper: NBER ID: w30231
Authors: Casey B. Mulligan
Abstract: In theory, equilibrium profits for drug patent holders would not involve significant restraints on production and patient utilization if the market had a mechanism for two-part pricing (Oi 1971) or quantity commitments (Murphy, Snyder, and Topel 2014). In fact, patent expiration has little effect on drug utilization especially when those drugs are delivered through insurance plans. This paper provides a quantitative model consistent with the theory and evidence in which pharmacy benefit management on behalf of insurance plans serves these and other purposes in both monopoly and oligopoly provider settings. Calibrating the model to the U.S. market, I conclude that pharmacy benefit management is worth at least $145 billion annually beyond its resource costs. PBM services add at least $192 billion annually in value to society compared to a manufacturer price-control regime. Requiring all PBM services to be self-provided by plan sponsors would forgo about 40 percent of the net value of PBM services largely by increasing management costs. Due to changes in the incidence of PBM services over the drug life cycle, the services encourage innovation even though they reduce the profits of incumbent manufacturers.
Keywords: No keywords provided
JEL Codes: D43; D71; I11; I13; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PBM services (L84) | economic pie in prescription markets (D45) |
| PBM services (L84) | lower retail prices (L42) |
| PBM services (L84) | lower manufacturing prices (L69) |
| PBM services (L84) | drug innovation (O35) |
| PBM services (L84) | increased drug utilization (H51) |
| PBM services (L84) | reduced costs (D61) |
| self-provision of PBM services (L84) | forgoing net value of PBM services (J17) |
| PBM services (L84) | value to society (D46) |
| PBM services (L84) | financial returns for manufacturers (L60) |