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American Economic Review: Insights

ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)

Insurance Design and Pharmaceutical Innovation

  • Leila Agha
  • Soomi Kim
  • Danielle Li
American Economic Review: Insights
vol. 4, no. 2, June 2022
(pp. 191–208)
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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 refusing to provide coverage for many newly approved drugs when cheaper alternatives were available. We document a shift in pharmaceutical R&D strategies after this policy took effect: therapeutic classes at greater risk of exclusion experienced a relative reduction in investments. This shift reduced development of drug candidates that appear more incremental: that is, those in drug classes with more preexisting therapies and less scientifically novel research.

Citation

Agha, Leila, Soomi Kim, and Danielle Li. 2022. "Insurance Design and Pharmaceutical Innovation." American Economic Review: Insights 4 (2): 191–208. DOI: 10.1257/aeri.20210063

Additional Materials

JEL Classification

  • G22 Insurance; Insurance Companies; Actuarial Studies
  • I13 Health Insurance, Public and Private
  • L65 Chemicals; Plastics; Rubber; Drugs; Biotechnology
  • O31 Innovation and Invention: Processes and Incentives