Kate Ho, Princeton University
Contracting over Rebates: Formulary Design and Pharmaceutical Spending
Prescription drug spending in the U.S. is high and increasing. This paper investigates whether the structure of the formulary developed by pharmacy benefit managers (PBMs) on behalf of plan sponsors can meaningfully constrain spending by affecting drug manufacturer rebates. We develop a theoretical model in which a single PBM contracts, on behalf of its sponsor, with multiple manufacturers over a menu of rebates corresponding to different formularies. Given this menu, the PBM then chooses the formulary. The model is applied to the empirical setting provided by Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees. Focusing on the market for statins, we estimate a model of enrollee demand and find that drugs’ placement on particular formulary tiers substantially affects volume. We simulate the impact of changing the number of tiers, and possibility of exclusion, on predicted rebates under our contracting model. Predicted rebate magnitudes are consistent with the previous literature. Rebates increase substantially with the PBM’s ability to move drugs to less preferred tiers.
Kate Ho is a Professor of Economics at Princeton University and co-director (with Janet Currie) of Princeton’s Center for Health and Wellbeing. She is an elected fellow of the Econometric Society, a research associate of the NBER, an associate editor at Econometrica, and has served as editor at the RAND Journal of Economics, co-editor at the American Economic Journal: Economic Policy and on the editorial boards of the American Economic Review, the American Economic Journal: Microeconomics and the Journal of Economic Literature. Her research focuses on the industrial organization of the medical care market. She is a recipient of the Frisch Medal from the Econometric Society and the Arrow Award from the International Health Economics Association. Prior to her academic career she spent four years as Private Secretary (Chief of Staff) to the U.K. Minister of State for Health.
Contact: Frederik Plesner Lyngse