Abstract
A diverse set of agents participate in American prescription drug markets, including insurers, pharmacy benefit managers (PBMs), pharmacies, drug manufacturers, and hospitals. These firms often face conflicting incentives, which may vary based on their organizational form and the regulatory environment in which they operate. Understanding how these incentives shape the interactions between these firms is important for the design of healthcare and antitrust policy. In this dissertation, I use a mix of economic theory, structural modeling, and reduced form research strategies to examine how regulations and organizational form affect firm behavior in the pharmaceutical supply chain.
Chapter 1 studies the effects of vertical integration between insurers, PBMs, and pharmacies on drug prices and insurance premiums. I construct an empirical model of pharmacy pricing, insurer premium setting, and consumer demand for insurance plans and pharmacies in Medicare Part D, a government program that provides subsidized drug insurance to older adults in the United States. I estimate the model using prescription drug claims data, which I combine with novel information on insurer-PBM relationships and pharmacy ownership. In equilibrium, vertically integrated insurers reduce premiums and increase internal prices for prescription fills, shifting profits to their pharmacies. Two institutional features motivate this profit-shifting strategy: consumer cost-sharing, which allows firms to retain profits on integrated prescription fills; and regulatory caps on insurer profits, which incentivize firms to "tunnel" excess profits to pharmacies through higher drug prices. My estimated model predicts that the divestiture of vertically integrated pharmacies would reduce drug prices by 7.3% and increase annual consumer surplus for Medicare enrollees by 8.1%.
Chapter 2 studies the economics of PBM contract design. PBMs are third-party administrators of prescription drug programs for health insurance plans. They play a crucial role in the healthcare system by negotiating drug prices with pharmacies. Consequently, their payment structure can significantly affect the price of prescription drugs. I study the price effects of requiring PBMs and insurers to replace their default fixed-price ("spread pricing") contracts with cost-plus contracts. Cost-plus contracts reduce the ability of PBMs to profit off of asymmetric information by revealing the true cost of drugs to insurers; however, they may also remove the profit incentive for PBMs to contain costs through aggressive negotiations with pharmacies. I study how these trade-offs affect drug prices in the context of Medicaid using novel data on state regulations of PBM-insurer contracts. Using difference-in-differences methods, I find that Medicaid prescription prices declined by an average of 15% in states that prohibited fixed-price contracting relative to states that did not. I find no evidence that cost-plus contracts reduce PBMs' effort in negotiating with pharmacies or in managing prescription drug utilization. My findings suggest that cost-plus contracts reduce drug prices by eliminating rents retained by PBMs without inducing meaningful moral hazard.
Chapter 3, which is joint work with Sylvia Hristakeva and Julie Holland Mortimer, studies the effect of price caps on the provision of costly effort by pharmaceutical firms using variation in drug discounts generated by a price regulation program that allows eligible hospitals to purchase outpatient drugs at steep discounts. These discounts directly affect drug manufacturers' markups, and may change firms' incentives to exert promotional effort targeted towards physicians at these hospitals. We find that the effects of price regulation on pharmaceutical firm effort depend crucially on the design of the regulations and the multi-product nature of pharmaceutical firms. Using detailed data on marketing payments from pharmaceutical firms to physicians, we observe that physicians receive 13% fewer promotional payments after their hospitals take up the program. The design of the price caps implies that discounts tend to increase with a drug's age. Consistent with theoretical predictions, we find that pharmaceutical firms shift promotional payments away from older drugs and towards newer drugs, which are less affected by the price caps. For some drugs, this shift results in an increase in payments to physicians despite the price caps. Understanding these strategic, non-price adjustments is important for policymakers seeking to design effective regulations targeting specific products.
