Pharmacy Benefit Managers as Bargaining Agents

The largest expansion of entitlement programs in the United States in decades – Medicare Part D – is set to commence on January 1st of 2006. On that day, retirees will be eligible for subsidized insurance covering outpatient drug prescriptions. The plan will be managed by private sector entities called pharmacy benefit managers (PBMs)This paper attempts to reverse misconceptions about PBMs that can be traced to price theory. Proposed is an alternative view based on bargaining theory. There are several fundamental insights gained by looking at PBMs through bargaining theory. First, rebates are not received in consideration for “moving markets” but for refraining from discretionary switching of one brand prescription for another. Second, rebates are not linear price reductions designed to increase demand, but the fixed component of a two-part tariff designed to shift rent to the buy side in a bilateral oligopoly