Profit Regulation and Strategic Transfer Pricing by Vertically Integrated Firms: Evidence from Health Care

Pragya Kakani, Eric Yde, Genevieve Kanter, Richard G. Frank and Amelia M. Bond

No 35043, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide evidence of strategic transfer pricing by vertically integrated health care firms in response to insurer profit regulations. Insurers increased prices at vertically integrated pharmacies by 9.5% following the introduction of caps on insurer profits in Medicare Part D. We detect larger price increases by insurers that were at greatest risk of exceeding the allowable profit level. More than one-fifth of these higher prices were borne by the federal government. Our analysis illustrates that vertically integrated firms can evade profit regulation by “tunneling” profits to unregulated subsidiaries, undermining regulatory intent and increasing health care spending.

JEL-codes: I11 I13 I18 L14 L22 L41 L51 (search for similar items in EconPapers)
Date: 2026-04
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