Drug Pricing for Competing Pharmaceutical Manufacturers Distributing through a Common PBM

Panos Kouvelis, Yixuan Xiao, Nan Yang

Research output: Contribution to journalArticle

Abstract

We study the price competition among multiple branded drug manufacturers when their drugs are distributed through a common pharmacy benefit manager (PBM). The PBM develops a drug benefit plan for its clients, which includes a formulary list that specifies the copayment for each branded drug, and a list of prices to be charged to the clients for each of the branded and generic drugs. Client organizations decide whether to contract with the PBM and pay the majority of drug costs, while the plan enrollees select which drug to consume. An important feature when multiple branded drugs are distributed through a common PBM is that the PBM's market size, measured by the number of prescriptions filled, depends on the aggregate attraction of all the drugs under the PBM's plan. Therefore, the branded drug manufacturers involuntarily cooperate in affecting the PBM's market size, while competing for the market shares under the PBM's plan, which leads to an intricate co-opetition among the branded drug manufacturers. We characterize the PBM's optimal copayment and pricing decisions, and establish conditions for the equilibrium analysis of the price competition among the branded drug manufacturers. In particular, we provide a sufficient condition for the uniqueness of the equilibrium, and characterize the equilibrium in closed form. We apply our model to study the strategic implications of vertical integration between a branded drug manufacturer and the PBM. By comparing the pre- and post-integration equilibrium outcomes, we characterize the impact of vertical integration on the branded drugs’ market shares and copayments, the non-integrated branded drug manufacturers’ effective wholesale prices and profits, the integrated PBM's total market size and profit, the aggregate profit of all branded drug manufacturers and the PBM, consumer surplus, and social welfare. We further explore the impact of vertical integration through numerical study.

Original languageEnglish (US)
Pages (from-to)1399-1419
Number of pages21
JournalProduction and Operations Management
Volume27
Issue number8
DOIs
StatePublished - Aug 1 2018

Fingerprint

Drug products
Managers
Costs
Profitability
Pricing
Pharmaceuticals
Drugs

Keywords

  • co-opetition
  • drug distribution
  • pharmacy benefit manager
  • pricing
  • vertical integration

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

Cite this

Drug Pricing for Competing Pharmaceutical Manufacturers Distributing through a Common PBM. / Kouvelis, Panos; Xiao, Yixuan; Yang, Nan.

In: Production and Operations Management, Vol. 27, No. 8, 01.08.2018, p. 1399-1419.

Research output: Contribution to journalArticle

@article{988db2f6d4304d1390cb7bb2fde6475e,
title = "Drug Pricing for Competing Pharmaceutical Manufacturers Distributing through a Common PBM",
abstract = "We study the price competition among multiple branded drug manufacturers when their drugs are distributed through a common pharmacy benefit manager (PBM). The PBM develops a drug benefit plan for its clients, which includes a formulary list that specifies the copayment for each branded drug, and a list of prices to be charged to the clients for each of the branded and generic drugs. Client organizations decide whether to contract with the PBM and pay the majority of drug costs, while the plan enrollees select which drug to consume. An important feature when multiple branded drugs are distributed through a common PBM is that the PBM's market size, measured by the number of prescriptions filled, depends on the aggregate attraction of all the drugs under the PBM's plan. Therefore, the branded drug manufacturers involuntarily cooperate in affecting the PBM's market size, while competing for the market shares under the PBM's plan, which leads to an intricate co-opetition among the branded drug manufacturers. We characterize the PBM's optimal copayment and pricing decisions, and establish conditions for the equilibrium analysis of the price competition among the branded drug manufacturers. In particular, we provide a sufficient condition for the uniqueness of the equilibrium, and characterize the equilibrium in closed form. We apply our model to study the strategic implications of vertical integration between a branded drug manufacturer and the PBM. By comparing the pre- and post-integration equilibrium outcomes, we characterize the impact of vertical integration on the branded drugs’ market shares and copayments, the non-integrated branded drug manufacturers’ effective wholesale prices and profits, the integrated PBM's total market size and profit, the aggregate profit of all branded drug manufacturers and the PBM, consumer surplus, and social welfare. We further explore the impact of vertical integration through numerical study.",
keywords = "co-opetition, drug distribution, pharmacy benefit manager, pricing, vertical integration",
author = "Panos Kouvelis and Yixuan Xiao and Nan Yang",
year = "2018",
month = "8",
day = "1",
doi = "10.1111/poms.12867",
language = "English (US)",
volume = "27",
pages = "1399--1419",
journal = "Production and Operations Management",
issn = "1059-1478",
publisher = "Wiley-Blackwell",
number = "8",

}

TY - JOUR

T1 - Drug Pricing for Competing Pharmaceutical Manufacturers Distributing through a Common PBM

AU - Kouvelis, Panos

AU - Xiao, Yixuan

AU - Yang, Nan

PY - 2018/8/1

Y1 - 2018/8/1

N2 - We study the price competition among multiple branded drug manufacturers when their drugs are distributed through a common pharmacy benefit manager (PBM). The PBM develops a drug benefit plan for its clients, which includes a formulary list that specifies the copayment for each branded drug, and a list of prices to be charged to the clients for each of the branded and generic drugs. Client organizations decide whether to contract with the PBM and pay the majority of drug costs, while the plan enrollees select which drug to consume. An important feature when multiple branded drugs are distributed through a common PBM is that the PBM's market size, measured by the number of prescriptions filled, depends on the aggregate attraction of all the drugs under the PBM's plan. Therefore, the branded drug manufacturers involuntarily cooperate in affecting the PBM's market size, while competing for the market shares under the PBM's plan, which leads to an intricate co-opetition among the branded drug manufacturers. We characterize the PBM's optimal copayment and pricing decisions, and establish conditions for the equilibrium analysis of the price competition among the branded drug manufacturers. In particular, we provide a sufficient condition for the uniqueness of the equilibrium, and characterize the equilibrium in closed form. We apply our model to study the strategic implications of vertical integration between a branded drug manufacturer and the PBM. By comparing the pre- and post-integration equilibrium outcomes, we characterize the impact of vertical integration on the branded drugs’ market shares and copayments, the non-integrated branded drug manufacturers’ effective wholesale prices and profits, the integrated PBM's total market size and profit, the aggregate profit of all branded drug manufacturers and the PBM, consumer surplus, and social welfare. We further explore the impact of vertical integration through numerical study.

AB - We study the price competition among multiple branded drug manufacturers when their drugs are distributed through a common pharmacy benefit manager (PBM). The PBM develops a drug benefit plan for its clients, which includes a formulary list that specifies the copayment for each branded drug, and a list of prices to be charged to the clients for each of the branded and generic drugs. Client organizations decide whether to contract with the PBM and pay the majority of drug costs, while the plan enrollees select which drug to consume. An important feature when multiple branded drugs are distributed through a common PBM is that the PBM's market size, measured by the number of prescriptions filled, depends on the aggregate attraction of all the drugs under the PBM's plan. Therefore, the branded drug manufacturers involuntarily cooperate in affecting the PBM's market size, while competing for the market shares under the PBM's plan, which leads to an intricate co-opetition among the branded drug manufacturers. We characterize the PBM's optimal copayment and pricing decisions, and establish conditions for the equilibrium analysis of the price competition among the branded drug manufacturers. In particular, we provide a sufficient condition for the uniqueness of the equilibrium, and characterize the equilibrium in closed form. We apply our model to study the strategic implications of vertical integration between a branded drug manufacturer and the PBM. By comparing the pre- and post-integration equilibrium outcomes, we characterize the impact of vertical integration on the branded drugs’ market shares and copayments, the non-integrated branded drug manufacturers’ effective wholesale prices and profits, the integrated PBM's total market size and profit, the aggregate profit of all branded drug manufacturers and the PBM, consumer surplus, and social welfare. We further explore the impact of vertical integration through numerical study.

KW - co-opetition

KW - drug distribution

KW - pharmacy benefit manager

KW - pricing

KW - vertical integration

UR - http://www.scopus.com/inward/record.url?scp=85052157625&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85052157625&partnerID=8YFLogxK

U2 - 10.1111/poms.12867

DO - 10.1111/poms.12867

M3 - Article

AN - SCOPUS:85052157625

VL - 27

SP - 1399

EP - 1419

JO - Production and Operations Management

JF - Production and Operations Management

SN - 1059-1478

IS - 8

ER -