NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Insurance Design and Pharmaceutical Innovation

Leila Agha, Soomi Kim, Danielle Li

NBER Working Paper No. 27563
Issued in July 2020
NBER Program(s):Economics of Aging, Corporate Finance, Health Care, Health Economics, Industrial Organization, Law and Economics, Labor Studies, Public Economics, Productivity, Innovation, and Entrepreneurship

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.

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Document Object Identifier (DOI): 10.3386/w27563

 
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