Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market

Rena Conti, Brigham Frandsen, Michael Powell and James Rebitzer

No 28866, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: I1 I11 L1 L14 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-com and nep-hea
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