Insurance Design and Pharmaceutical Innovation

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 show that this policy reshaped upstream pharmaceutical R&D, shifting investments away from therapeutic classes at greater risk of exclusion. This move 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.