Contracting over Pharmaceutical Formularies and Rebates

Kate Ho and Robin Lee

No 32790, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate how formularies used by pharmacy benefit managers (PBMs) can affect manufacturer rebates for branded drugs. We first present a theoretical model of multidimensional contracting in which a PBM negotiates with drug manufacturers over menus of formulary-contingent rebate payments and then selects a formulary. We then estimate how formulary placement affects drug demand for statins using data from Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees. Using our theoretical model and demand estimates, we predict how rebates are affected by the use of a preferred tier in the formulary or the ability to exclude a drug from coverage. Our predictions align with aggregate rebate data, and we find that allowing a PBM to place branded drugs on preferred and non-preferred tiers can substantially increase negotiated rebate payments.

JEL-codes: I11 L14 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-com, nep-hea and nep-ind
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