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Insurance Design and Pharmaceutical Innovation

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  • Leila Agha
  • Soomi Kim
  • Danielle Li

Abstract

This paper studies how insurance coverage policies impact pharmaceutical innovation. In the United States, most patients obtain prescription drugs through insurance plans administered by Pharmacy Benefit Managers (PBMs). Beginning in 2012, PBMs began refusing to provide coverage for many newly approved drugs when cheaper alternatives were available. We document a shift in pharmaceutical R&D strategies after this policy took effect: therapeutic classes at greater risk of exclusion experienced a relative reduction in investments. This shift reduced development of drug candidates that appear more incremental: that is, those in drug classes with more preexisting therapies and less scientifically novel research.

Suggested Citation

  • Leila Agha & Soomi Kim & Danielle Li, 2022. "Insurance Design and Pharmaceutical Innovation," American Economic Review: Insights, American Economic Association, vol. 4(2), pages 191-208, June.
    • Handle: RePEc:aea:aerins:v:4:y:2022:i:2:p:191-208
    DOI: 10.1257/aeri.20210063
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    Cited by:

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    3. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    4. Jeffrey P. Clemens & Morten Olsen, 2021. "Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation," CESifo Working Paper Series 9008, CESifo.
    5. Gamba, Simona & Magazzini, Laura & Pertile, Paolo, 2021. "R&D and market size: Who benefits from orphan drug legislation?," Journal of Health Economics, Elsevier, vol. 80(C).
    6. Kelli Marquardt, 2024. "Liran Einav and Amy Finkelstein: We’ve got you covered: rebooting American health care," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 59(3), pages 190-192, July.
    7. Massimo Florio & Simona Gamba, 2021. "Biomed Europa: After the coronavirus, a public infrastructure to overcome the pharmaceutical oligopoly," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 92(3), pages 387-409, September.
    8. Chiang, Chia-Chun & Niehaus, Greg, 2024. "Market discipline and policy loans," Journal of Banking & Finance, Elsevier, vol. 159(C).
    9. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2023. "The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 90(C).

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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