Biopharmaceuticals advance health and economic growth. Unlike central bargaining abroad, the United States uses private firms, pharmacy benefit managers (PBMs), to manage medicine access and spending. Yet, PBMs' roles in advancing efficiency are understudied. Ho and Lee model PBMs' use of tiered formularies, lists of covered medicines, without the use of proprietary data on the price concessions drug makers offer for preferred placement. They find PBMs' use of tiered formularies generate significant payor savings through competition. Complementing Ho and Lee, Feng and Maini (2024) model how patient demand inertia limits PBMs' ability to extract price concessions from drug makers which consequently erodes the efficacy gains of PBM formularies. Conti, Frandsen, Powell, and Rebitzer (2021) model formulary auctions where PBM size drives payor savings, but also spurs endogenously set high list prices, reducing patient access. Future economic research should focus on PBM market entry and vertical integration, pharmacy steering, and effects on innovation.

Abstract Pharmacy benefit managers dominate the U.S. pharmaceutical market but are controversial and poorly understood. We analyze PBMs as market intermediaries that operate formulary contests in which on-patent brand-drug makers compete for favorable placement by offering rebates off list price. These formulary contests deliver efficiency gains compared to drug makers selling directly to consumers; PBMs capture some of these gains. Our approach answers key questions regarding the determinants of efficiency, rebates, list prices, and PBM market power in the pharmaceutical market. Our analysis also explains how common contracting practices, federal regulations, and incentives within formulary contests can undermine market efficiency.