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

Author

Listed:
  • Rena M. Conti
  • Brigham Frandsen
  • Michael L. Powell
  • James B. Rebitzer

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.

Suggested Citation

  • Rena M. Conti & Brigham Frandsen & Michael L. Powell & James B. Rebitzer, 2021. "Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market," NBER Working Papers 28866, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28866
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    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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