Regulating the Middleman

Pharmacy benefit managers (PBMs) are third-party administrators that assist employers and insurers in managing prescription drug benefits. The practices of PBMs remain largely unregulated at the national level and lack transparency, despite their growing influence over the pharmaceutical market. This project offers insight into the complexity of the pharmaceutical supply chain in the U.S. by first detailing the context of which pharmacy benefit managers have evolved and fallen under scrutiny for their practices. Second, I characterize PBMs and the companies that contract out to them through a principal-agent relationship and find evidence to suggest that PBMs wield their drug formularies as imperfect agents. This is done by assessing the relationship between the three largest PBMs’ formularies and pharmaceutical costs by analyzing the drugs included on their yearly formulary plans and the National Average Drug Acquisition Cost (NADAC) of these drugs. Third, I explain the spread of PBM targeted regulatory legislation across the states through interest group pressure from a market adversary, PhRMA. To gain a market advantage, I argue that pharmaceutical manufacturers used their state-level influence to reduce the power of PBMs. I develop a Cox proportional hazards model to estimate the influence of PhRMA’s monetary contributions to state-level campaigns on the adoption rate of PBM regulatory policies by state governments from 2000-2013. Fourth, I assess the effectiveness of state-level maximum allowable cost (MAC) transparency regulations in reducing the PBM practice of spread pricing from 2013-2018. I rely on a difference-in-differences design to evaluate changes in the markup of reimbursement rates in states before and after legislation was enacted and find evidence that these regulations are effective in reducing the markup in reimbursements from state Medicaid programs.