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Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market


Pharmacy benefit managers (PBMs) are intermediaries that manage pre-scription drug purchases for health plans and other payers. PBMs play a central, but little analyzed, role in the U.S. market for prescription drugs. Drug makers selling branded pharmaceuticals bid for desirable slots on the PBM’s formulary by offering rebates off of a drug’s list price. These formularies operate like all-pay contests. We find that PBMs enhance market efficiency, but the efficiency gains do not accrue to consumers or drug makers. Our analysis offers insights into otherwise-puzzling questions. Why do drug makers pay rebates to PBMs? Why do payers delegate the critical formulary function to PBMs? Why is the market dominated by a small number of very large PBMs acting as the common agent for many payers? Why are the list prices of branded drugs so high? Why might PBMs vertically integrate with payers? Our framework also offers insights into policy proposals for reforming the market for prescription drugs.


Working Paper


Michael Powell, Rena Conti, Brigham Frandsen, James Rebitzer

Date Published



Powell, Michael, Rena Conti, Brigham Frandsen, and James Rebitzer. 2021. Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market.


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