Insurance Design and Pharmaceutical Innovation

Insurance Design and Pharmaceutical Innovation

This paper studies how insurance coverage policies affect incentives for pharmaceutical innovation. In the United States, the majority of drugs are sold to Pharmacy Benefit Managers (PBMs), which administer prescription drug plans on behalf of insurers. Beginning in 2012, PBMs began adopting “closed formularies”, excluding coverage for certain drugs, including many newly approved drugs, when adequate substitutes were available. We show that this policy reshaped upstream R&D activity and led pharmaceutical firms to shift investment away from therapeutic classes at greater risk of facing coverage exclusions. This move translated into a relative decline in the number of drug candidates that appear more incremental in their therapeutic contribution: that is, those in drug classes with more pre-existing therapies and less scientifically novel research.

Leila Agha, Soomi Kim, and Danielle Li


July 2020

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By |2020-07-21T14:00:28-07:00July 21st, 2020|Intellectual Property, Political Economy, Reference|