Preferred Pharmacy Networks and Drug Costs (WP-18-27)
Amanda Starc and Ashley Swanson
Selective contracting is an increasingly popular tool for reducing health care costs, but thesesavings must be weighed against consumer surplus losses from restricted access. In both public
and private prescription drug insurance plans, issuers utilize preferred pharmacy networks to
reduce drug prices. We show that, in the Medicare Part D program, drug plans with more
restrictive preferred pharmacy networks, and plans with fewer enrollees who are insensitive to
preferred pharmacy discounts on copays, pay lower retail drug prices. We then use estimates of
plan and pharmacy demand to estimate the first-order costs and benefits of selective contracting
in the presence of enrollees with heterogeneous sensitivity to preferred supplier incentives.