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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 these
savings 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.

Amanda Starc, Associate Professor of Strategy and IPR Associate, Northwestern University

Ashley Swanson, Assistant Professor of Healthcare Management, University of Pennsylvania

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