Selective Contracting in Prescription Drugs: The Benefits of Pharmacy Networks

Abstract

Selective contracting in health care involves contractual arrangements among insurers and health care providers that give covered individuals a financial incentive to obtain health care from a limited panel of providers. Although selective contracting has been an important strategy of health insurance plans for decades, it has only recently expanded to prescription drug coverage. Drug plans now create pharmacy networks that channel customers to in-network pharmacies. Pharmacies compete to be part of the networks by offering discounts on the drugs they sell to covered customers and drug plans. Although networks can lower prescription drug costs for drug plans and consumers, opponents have argued that they also reduce access to care because consumers can only visit certain providers. In this Article, I use the principles of economic theory, the conclusions of previous empirical studies, the determinations of the FTC, and proprietary data I obtained from the largest pharmacy benefit manager in the United States to analyze both the claims in support of pharmacy networks and the arguments against them. I find that pharmacy networks significantly lower the cost of prescription drugs for drug plans and consumers. Moreover, pharmacy networks have almost no effect on most consumers’ access to pharmacies; the overwhelming majority of consumers live near retail pharmacies that are included in exclusive pharmacy networks.