IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v17y2015i4p511-526.html
   My bibliography  Save this article

PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing

Author

Listed:
  • Panos Kouvelis

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Yixuan Xiao

    (Department of Management Sciences, College of Business, City University of Hong Kong, Hong Kong)

  • Nan Yang

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

Abstract

We model the competition among multiple pharmacy benefit managers (PBMs) for the patronage of a client organization. Each PBM selects a list of prices to be charged to the client organization for each of the branded and generic drugs within a therapeutic class (price decision) and a formulary list that assigns branded drugs to preferred or nonpreferred tiers (formulary decision). Drug manufacturers offer rebates to PBMs for drugs on preferred tier of formularies. The individuals participating in the client’s pharmacy benefit plan are the ones consuming the drugs and making purchasing decisions, whereas the client organization is paying the majority of drug cost. The choices of the individuals and the client organization are governed by different utility measures. For this complex drug distribution setting and for competing PBMs, we show the existence and uniqueness of a pure Nash equilibrium on aggregate formulary and price decisions, which represent the welfare-adjusted cost and welfare-adjusted price of each PBM’s plan, respectively. We characterize each PBM’s optimal formulary and equilibrium price decisions and discuss the impact of various model primitives. We apply our model to gain insights on the impact of mergers in the PBM industry.

Suggested Citation

  • Panos Kouvelis & Yixuan Xiao & Nan Yang, 2015. "PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 511-526, October.
    • Handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:511-526
    DOI: 10.1287/msom.2015.0542
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.2015.0542
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.2015.0542?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-130, January.
    2. Anderson, Simon P & de Palma, Andre, 1992. "Multiproduct Firms: A Nested Logit Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 261-276, September.
    3. Howard Shelanski & Joseph Farrell & Daniel Hanner & Christopher Metcalf & Mary Sullivan & Brett Wendling, 2012. "Economics at the FTC: Drug and PBM Mergers and Drip Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 41(4), pages 303-319, December.
    4. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, September.
    5. Özden Gür Ali & Murali Mantrala, 2010. "Pharma rebates, pharmacy benefit managers and employer outcomes," Health Care Management Science, Springer, vol. 13(4), pages 281-293, December.
    6. Grabowski, Henry & Mullins, C. Daniel, 1997. "Pharmacy benefit management, cost-effectiveness analysis and drug formulary decisions," Social Science & Medicine, Elsevier, vol. 45(4), pages 535-544, August.
    7. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 407-426, October.
    8. Hongmin Li & Woonghee Tim Huh, 2011. "Pricing Multiple Products with the Multinomial Logit and Nested Logit Models: Concavity and Implications," Manufacturing & Service Operations Management, INFORMS, vol. 13(4), pages 549-563, October.
    9. John Rizzo & Richard Zeckhauser, 2009. "Generic script share and the price of brand-name drugs: the role of consumer choice," International Journal of Health Economics and Management, Springer, vol. 9(3), pages 291-316, September.
    10. Guillermo Gallego & Woonghee Tim Huh & Wanmo Kang & Robert Phillips, 2006. "Price Competition with the Attraction Demand Model: Existence of Unique Equilibrium and Its Stability," Manufacturing & Service Operations Management, INFORMS, vol. 8(4), pages 359-375, June.
    11. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ruxian Wang & Zizhuo Wang, 2017. "Consumer Choice Models with Endogenous Network Effects," Management Science, INFORMS, vol. 63(11), pages 3944-3960, November.
    2. Faghih-Roohi, Shahrzad & Akcay, Alp & Zhang, Yingqian & Shekarian, Ehsan & de Jong, Eelco, 2020. "A group risk assessment approach for the selection of pharmaceutical product shipping lanes," International Journal of Production Economics, Elsevier, vol. 229(C).
    3. Hongmin Li & Scott Webster, 2017. "Optimal Pricing of Correlated Product Options Under the Paired Combinatorial Logit Model," Operations Research, INFORMS, vol. 65(5), pages 1215-1230, October.
    4. Yu Xia & Jing Li & Zhongyang Zhang, 2023. "Effects of price cap regulation on pharmaceutical supply chain under the zero markup drug policy," Operational Research, Springer, vol. 23(4), pages 1-27, December.
    5. Yanbo Ma & Zheng Li & Kaiyue Liu & Zhengmin Liu, 2022. "Price Decision-Making in Dual-Channel Healthcare Services Supply Chain Considering the Channel Acceptance, Price Ceiling, and Public Welfare," IJERPH, MDPI, vol. 19(20), pages 1-23, October.
    6. Gregory J. King & Xiuli Chao & Izak Duenyas, 2019. "Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?," Management Science, INFORMS, vol. 65(8), pages 3758-3775, August.
    7. Lin, Xiaogang & Chen, Danna & Zhou, Yong-Wu & Lin, Qiang, 2022. "Horizontal mergers in low carbon manufacturing," European Journal of Operational Research, Elsevier, vol. 297(1), pages 359-368.
    8. Hongmin Li & Scott Webster & Nicholas Mason & Karl Kempf, 2019. "Product-Line Pricing Under Discrete Mixed Multinomial Logit Demand," Service Science, INFORMS, vol. 21(1), pages 14-28, January.
    9. Tinglong Dai & Sridhar Tayur, 2020. "OM Forum—Healthcare Operations Management: A Snapshot of Emerging Research," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 869-887, September.
    10. Woonghee T. Huh & Hongmin Li, 2023. "Product‐line pricing with dual objective of profit and consumer surplus," Production and Operations Management, Production and Operations Management Society, vol. 32(4), pages 1223-1242, April.
    11. Liu, Lu & Feng, Lipan & Jiang, Tao & Zhang, Qian, 2021. "The impact of supply chain competition on the introduction of clean development mechanisms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 155(C).
    12. Pinar Keskinocak & Nicos Savva, 2020. "A Review of the Healthcare-Management (Modeling) Literature Published in Manufacturing & Service Operations Management," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 59-72, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hai Jiang & Rui Chen & He Sun, 2017. "Multiproduct price optimization under the multilevel nested logit model," Annals of Operations Research, Springer, vol. 254(1), pages 131-164, July.
    2. Pereira, Pedro & Ribeiro, Tiago, 2011. "The impact on broadband access to the Internet of the dual ownership of telephone and cable networks," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 283-293, March.
    3. Maxim Sinitsyn, 2020. "Evaluating horizontal mergers in the presence of price promotions," Quantitative Marketing and Economics (QME), Springer, vol. 18(1), pages 39-60, March.
    4. Jerome Foncel & Marc Ivaldi & Jrisy Motis, 2008. "An Econometric Workbench for Comparing the Substantive and Dominance Tests in Horizontal Merger Analysis," Working Papers 0833, University of Crete, Department of Economics.
    5. Ramos, Raúl & Silva, Hugo E., 2023. "Fare evasion in public transport: How does it affect the optimal design and pricing?," Transportation Research Part B: Methodological, Elsevier, vol. 176(C).
    6. Zhou, Yong-Wu & Lin, Xiaogang & Zhong, Yuanguang & Xie, Wei, 2019. "Contract selection for a multi-service sharing platform with self-scheduling capacity," Omega, Elsevier, vol. 86(C), pages 198-217.
    7. Cabral, Luis M. B., 2003. "Horizontal mergers with free-entry: why cost efficiencies may be a weak defense and asset sales a poor remedy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 607-623, May.
    8. Brito, Duarte & Pereira, Pedro & Ramalho, Joaquim J.S., 2013. "Mergers, coordinated effects and efficiency in the Portuguese non-life insurance industry," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 554-568.
    9. Patrick Sun, 2014. "Quality Competition in Mobile Telecommunications: Evidence from Connecticut," Working Papers 14-05, NET Institute.
    10. Guillermo Gallego & Huseyin Topaloglu, 2014. "Constrained Assortment Optimization for the Nested Logit Model," Management Science, INFORMS, vol. 60(10), pages 2583-2601, October.
    11. Maxime C. Cohen & Renyu Zhang, 2022. "Competition and coopetition for two‐sided platforms," Production and Operations Management, Production and Operations Management Society, vol. 31(5), pages 1997-2014, May.
    12. Neha Bairoliya & Pinar Karaca-Mandic & Jeffrey S. McCullough & Amil Petrin, 2017. "Consumer Learning and the Entry of Generic Pharmaceuticals," NBER Working Papers 23662, National Bureau of Economic Research, Inc.
    13. Woonghee T. Huh & Hongmin Li, 2023. "Product‐line pricing with dual objective of profit and consumer surplus," Production and Operations Management, Production and Operations Management Society, vol. 32(4), pages 1223-1242, April.
    14. Oh, Jaelynn & Huh, Woonghee Tim, 2022. "Hidden city travel and its impact on airfare: The case with competing airlines," Transportation Research Part B: Methodological, Elsevier, vol. 156(C), pages 101-109.
    15. Guillermo Gallego & Ruxian Wang, 2014. "Multiproduct Price Optimization and Competition Under the Nested Logit Model with Product-Differentiated Price Sensitivities," Operations Research, INFORMS, vol. 62(2), pages 450-461, April.
    16. Grzybowski, Lukasz & Hasbi, Maude & Liang, Julienne, 2018. "Transition from copper to fiber broadband: The role of connection speed and switching costs," Information Economics and Policy, Elsevier, vol. 42(C), pages 1-10.
    17. Xi Chen & Zachary Owen & Clark Pixton & David Simchi-Levi, 2022. "A Statistical Learning Approach to Personalization in Revenue Management," Management Science, INFORMS, vol. 68(3), pages 1923-1937, March.
    18. Chorus, Caspar & van Cranenburgh, Sander & Daniel, Aemiro Melkamu & Sandorf, Erlend Dancke & Sobhani, Anae & Szép, Teodóra, 2021. "Obfuscation maximization-based decision-making: Theory, methodology and first empirical evidence," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 28-44.
    19. Yann Algan & Clément Malgouyres & Thierry Mayer & Mathias Thoenig, 2022. "The Economic Incentives of Cultural Transmission: Spatial Evidence from Naming Patterns Across France [‘Cultural assimilation during the age of mass migration’]," The Economic Journal, Royal Economic Society, vol. 132(642), pages 437-470.
    20. Villas-Boas, Sofia B & Taylor, Rebecca & Krovetz, Hannah, 2016. "Willingness to Pay for Low Water Footprint Food Choices During Drought," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9vh3x180, Department of Agricultural & Resource Economics, UC Berkeley.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:511-526. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.