Economics at the FTC: Drug and PBM Mergers and Drip Pricing

Shelanski, Howard A.; Farrell, Joseph; Hanner, Daniel; Metcalf, Christopher J.; Sullivan, Mary W.; Wendling, Brett W.

doi:10.1007/s11151-012-9360-x

Cited by 17 publications

(13 citation statements)

References 6 publications

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“…In an environment with limited total drug manufacturing capacity and drug manufacturers able to withstand negotiation pressures due to an increased global drug demand, our model tends to predict that clients may not appropriate much value in an after-PBM-merger environment. This prediction is confirmed by a recent empirical study on the Express Scripts/Medco merger, conducted by the economists at the Federal Trade Commission, Shelanski et al (2012). This study employs two approaches to analyze the impact of PBM mergers on costs, and concludes that "Neither approach revealed significant incremental scale economies in the negotiation of rebates or pharmacy reimbursement" (Shelanski et al 2012, page 306).…”

Section: Impact Of Pbm Mergersmentioning

confidence: 72%

PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing

Kouvelis

Xiao²,

Yang

2015

M&SOM

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In this paper, we model the competition among multiple Pharmacy Benefit Managers (PBMs) for the patronage of a client organization. Each PBM selects a list of prices to be charged to the client organization for each of the branded and generic drugs within a therapeutical class (price decision) and a formulary list that assigns branded drugs to preferred or non-preferred tiers (formulary decision). Drug manufacturers offer rebates to PBMs for drugs on preferred tier of formularies. The individuals participating in the client's pharmacy benefit plan are the ones consuming the drugs and making purchasing decisions, while the client organization is paying the majority of drug cost. The choices of the individuals and the client organization are governed by different utility measures. For this complex drug distribution setting and for competing PBMs, we show the existence and uniqueness of a pure Nash equilibrium on aggregate price and formulary decisions. Moreover, the formulary list for each PBM is a dominant choice, in the sense that it is optimal irrespective of the choices made by the competing PBMs. We characterize each PBM's optimal formulary and equilibrium price decisions, and discuss the impact of various model primitives on these decisions. As an application of our model, we use it to gain insights on the impact of mergers in the PBM industry for both PBMs and the client. Finally, we extend our base model to the more general setting of multiple client organizations, each with drugs from multiple therapeutical classes.

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Section: Impact Of Pbm Mergersmentioning

confidence: 72%

PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing

Kouvelis

Xiao²,

Yang

2015

M&SOM

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“…Another potential limitation of complaints data is that it does not necessarily represent the experiences of all (or even average) consumers. In particular, certain demographics are likely to be overrepresented in complaints databases, including older, educated, affluent, and more urban consumers who speak the country's predominant language (OECD, 2012 [9]; Raval, 2019 [17]). Hence, while complaints data can be very useful to inform the understanding of consumer detriment, complaint rates may reflect differences in the incidence of consumer reporting rather than consumer victimisation.…”

Section: … a Consumer's Decision To Complain Is Based On A Consumer'smentioning

confidence: 99%

Measuring consumer detriment and the impact of consumer policy

2020

OECD Digital Economy Papers

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“…Note that these terms are often used more broadly by other researchers. For instance, Morwitz, Greenleaf, Shalev and Johnson (2013) include drip pricing as a special case of partition pricing and Shelanski, Farrell, Hanner, Metcalf, Sullivan and Wendling (2012) include add-on pricing as a type of drip pricing.…”

Section: Limited Searchmentioning

confidence: 99%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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Economics at the FTC: Drug and PBM Mergers and Drip Pricing

Cited by 17 publications

References 6 publications

PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing

PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing

Measuring consumer detriment and the impact of consumer policy

Failing to Choose the Best Price: Theory, Evidence, and Policy

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