Ending Pay for PBM Performance: Consequences for Prescription Drug Prices, Utilization, and Government Spending

Casey Mulligan

No 31667, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D43 D71 I13 J24 L14 L51 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-com and nep-inv
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