Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?

• Published in: Management science Vol. 65; no. 8; pp. 3758 - 3775
• Main Authors: King, Gregory J, Chao, Xiuli, Duenyas, Izak
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01-08-2019; Institute for Operations Research and the Management Sciences
• Subjects: Bans; Companies; Consumer advocacy; Consumer behavior; Consumer groups; Costs; Coupons; Discount coupons; Drug formularies; Drug prices; Drugs; Health care expenditures; health care management; Health insurance; Insurance companies; Insurance industry; Insurance policies; Manufacturers; Nash equilibrium; Personal expenditure; Pharmaceutical industry; Pharmacists; Prescribing; Prescription drugs; Profit margins; United States > US
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2018.3123

The rising cost of prescription drugs is a concern in the United States. To manage drug costs, insurance companies induce patients to choose less-expensive medications by making them pay higher copayments for more-expensive drugs, especially when multiple drug options are available to treat a condition. However, drug manufacturers have responded by offering copay coupons—coupons intended to be used by those already with prescription drug coverage. Recent empirical work has shown that such coupons significantly increase insurer costs without much benefit to patients, who incur lower out-of-pocket expenses with coupons but may eventually see higher costs passed to them. As a result, there is pressure from the insurance industry and consumer advocacy groups to ban copay coupons. In this paper we analyze how copay coupons affect patients, insurance companies, and drug manufacturers, while addressing the question of whether insurance companies would in fact always benefit from a copay coupon ban. We find that copay coupons tend to benefit drug manufacturers with large profit margins relative to other manufacturers, while generally, but not always, benefiting patients; insurer costs tend to increase with coupons from high-price drug manufacturers and decrease with coupons from low-price manufacturers. Although often helping drug manufacturers and increasing insurer costs, we also identify situations in which copay coupons benefit both patients and insurers. Thus, a blanket ban on copay coupons would not necessarily benefit insurance companies. In addition to the policy implications of our work, we make concrete managerial recommendations to insurers. We discuss how they should set formulary selection policies taking into account the fact that drug manufacturers may offer coupons; and we suggest how they can benefit from subsidizing coupons from drug manufacturers with low-price drugs, or from having drug manufacturers compete on price, to receive a favorable formulary position (i.e., copay).
This paper was accepted by Yossi Aviv, operations management.