Insurance Design and Pharmaceutical Innovation

69 Pages Posted: 24 Jul 2020 Last revised: 25 Apr 2021

See all articles by Leila Agha

Leila Agha

Dartmouth College

Soomi Kim

Massachusetts Institute of Technology (MIT)

Danielle Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 2020

Abstract

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.

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Suggested Citation

Agha, Leila and Kim, Soomi and Li, Danielle, Insurance Design and Pharmaceutical Innovation (July 2020). NBER Working Paper No. w27563, Available at SSRN: https://ssrn.com/abstract=3658859

Leila Agha (Contact Author)

Dartmouth College

Soomi Kim

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Danielle Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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