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.
We are grateful to Jason Abaluck, Pierre Azoulay, Katherine Baicker, Ernst Berndt, Alex Frankel, Erzo Luttmer, Jonathan Skinner, Christopher Snyder, Scott Stern, and Heidi Williams 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.