Insurance Design and Pharmaceutical Innovation
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 excluding coverage for many newly approved drugs when cheaper alternatives were available. Relative to ﬁrms’ existing practices, we show that exclusions substantially reduced insurance claims for targeted drugs, lowering their proﬁtability. This new risk of coverage exclusion reshaped upstream pharmaceutical R&D: for every 1 standard deviation increase in drug class exclusion risk, we estimate an 11% decline in subsequent development activity. This change translated into a relative decline in the development of drug candidates that appear more incremental: that is, those in drug classes with more pre-existing therapies and with less scientiﬁcally novel research.
We are grateful to Jason Abaluck, Pierre Azoulay, Katherine Baicker, Ernst Berndt, Alex Frankel, Erzo Luttmer, Jonathan Skinner, Christopher Snyder, Doug Staiger, Scott Stern, and Heidi Williams, as well as participants at NBER Summer Institute and various seminar participants for helpful feedback on this project. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Leila Agha & Soomi Kim & Danielle Li, 2022. "Insurance Design and Pharmaceutical Innovation," American Economic Review: Insights, vol 4(2), pages 191-208.