Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?

Gregory J. King (), Xiuli Chao () and Izak Duenyas ()
Additional contact information
Gregory J. King: GAP Inc., San Francisco, CA 94105
Xiuli Chao: Industrial and Operations Engineering, University of Michigan, Ann Arbor, Michigan 48109
Izak Duenyas: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109-1234

Management Science, 2019, vol. 65, issue 8, 3758-3775

Abstract: The rising cost of prescription drugs is a concern in the United States. To manage drug costs, insurance companies induce patients to choose less-expensive medications by making them pay higher copayments for more-expensive drugs, especially when multiple drug options are available to treat a condition. However, drug manufacturers have responded by offering copay coupons—coupons intended to be used by those already with prescription drug coverage. Recent empirical work has shown that such coupons significantly increase insurer costs without much benefit to patients, who incur lower out-of-pocket expenses with coupons but may eventually see higher costs passed to them. As a result, there is pressure from the insurance industry and consumer advocacy groups to ban copay coupons. In this paper we analyze how copay coupons affect patients, insurance companies, and drug manufacturers, while addressing the question of whether insurance companies would in fact always benefit from a copay coupon ban. We find that copay coupons tend to benefit drug manufacturers with large profit margins relative to other manufacturers, while generally, but not always, benefiting patients; insurer costs tend to increase with coupons from high-price drug manufacturers and decrease with coupons from low-price manufacturers. Although often helping drug manufacturers and increasing insurer costs, we also identify situations in which copay coupons benefit both patients and insurers. Thus, a blanket ban on copay coupons would not necessarily benefit insurance companies. In addition to the policy implications of our work, we make concrete managerial recommendations to insurers. We discuss how they should set formulary selection policies taking into account the fact that drug manufacturers may offer coupons; and we suggest how they can benefit from subsidizing coupons from drug manufacturers with low-price drugs, or from having drug manufacturers compete on price, to receive a favorable formulary position (i.e., copay).

Keywords: consumer behavior; Nash equilibrium; health care management (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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