Author's School

Olin Business School

Author's Department/Program

Business Administration


English (en)

Date of Award

Summer 9-1-2014

Degree Type


Degree Name

Doctor of Philosophy (PhD)

Chair and Committee

Panos Kouvelis


This dissertation focuses on drug distribution through Pharmacy Benefit Managers (PBMs) in the pharmaceutical supply chain. PBMs are companies like Express/Medco, CVS/Caremark, which are a very important part of the US healthcare market. They are the intermediaries between their clients (major corporations, government organizations, insurance companies etc.) and the rest of the pharmaceutical supply chain (drug manufacturers/wholesalers and pharmacies). PBMs help their clients control the drug cost of their plan through designing formularies for them and negotiating wholesale prices with drug manufacturers/wholesalers and reimbursement with pharmacies and other players in the supply chain. Given the importance and complexity of the pharmaceutical market, understanding the role of PBMs in the US healthcare system is critical for academicians and practitioners, as well as for policy makers. This dissertation develops a theoretical model that captures the complex role PBMs play in the financial flows of pharmaceutical supply chains. We study the competition among multiple Pharmacy Benefit Managers (PBMs) for the patronage of a client organization. Each PBM selects a list of prices to be charged to the client organization for each of the branded and generic drugs within a therapeutical class (price decision) and a formulary list that assigns branded drugs to preferred or non-preferred tiers (formulary decision). Drug manufacturers offer rebates to PBMs for drugs on preferred tier of formularies. The individuals participating in the client's pharmacy benefit plan are the ones consuming the drugs and making purchasing decisions, while the client organization is paying the majority of drug cost. The choices of the individuals and the client organization are governed by different utility measures. For this complex drug distribution setting and for competing PBMs, we show the existence and uniqueness of a pure Nash equilibrium on aggregate price and formulary decisions. Moreover, the formulary list for each PBM is a dominant choice, in the sense that it is optimal irrespective of the choices made by the competing PBMs. We characterize each PBM's optimal formulary and equilibrium price decisions, and discuss the impact of various model primitives on these decisions. As an application of our model, we use it to gain insights on the impact of mergers in the PBM industry for both PBMs and the client. Finally, we extend our base model to the more general setting of multiple client organizations, each with drugs from multiple therapeutical classes. We investigate the competition among branded drug manufacturers when their drugs are distributed through a common PBM. The PBM administers a prescription drug benefit program for its clients, and to the individuals who participate in the PBM's plan. We model the interactions among drug manufacturers and the PBM as a two-stage game. In the first stage, pharmaceutical companies simultaneously set prices and rebates for their products charged to the PBM; In the second stage, the PBM develops a standardized formulary for the plan enrollees on behalf of their clients, which specifies the copayment for each drug. When designing the health plan formulary for its clients, a PBM needs to consider not only controlling the cost of the drugs consumed under the plan, but also the consumer welfare of the participants enrolled in its pharmacy benefit plan. Such concern is due to a PBM's commitment to its clients to provide long-term quality benefit for the plan beneficiaries, winning potential clients from competing PBMs/healthcare plans, and the need for regulatory approvals. We incorporate the consumer welfare of the plan enrollees into the PBM's objective function, analyze the PBM's copayment decision, and the equilibrium pricing behavior for competing drug manufacturers. We discuss the implications of various parameters on the equilibrium outcome for the plan enrollees, the PBM, and the drug manufacturers. We also apply our model to investigate the impact of a vertical integration of a pharmaceutical manufacturer and a PBM.


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