Working Paper: NBER ID: w31667
Authors: Casey B. Mulligan
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.
Keywords: Pharmacy Benefit Managers; Drug Prices; Medicare; Health Economics
JEL Codes: D43; D71; I13; J24; L14; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Removal of pay for performance (J33) | Increase in drug prices (E31) |
| Removal of pay for performance (J33) | Reduced PBM performance (D29) |
| Reduced PBM performance (D29) | Decreased drug utilization (I19) |
| Decreased drug utilization (I19) | Increase in federal spending on Medicare Part D (H51) |
| Removal of pay for performance (J33) | Increase in federal spending on Medicare Part D (H51) |