Disadvantaging Rivals: Vertical Integration in the Pharmaceutical Market

Abstract

The pharmaceutical market has experienced a massive wave of vertical integration between pharmacy benefit managers (PBMs) and health insurers in recent years. Using a unique dataset on insurer-PBM contracts, we document increasing vertical integration in Medicare Part D–vertically integrated insurers’ market share increased from about 30% to 80% between 2010 and 2018. Next, we evaluate a large insurer-PBM merger in 2015 to assess the trade-offs of vertical integration–harms to competition due to input and customer foreclosure on the one hand and improved efficiency on the other. We find premium increases after the merger for insurers who bought PBM services from rivals, which is consistent with vertically integrated PBMs raising costs through input foreclosure.

Key Findings:

1. Part D beneficiaries enrolled in a plan that is vertically integrated with a PBM increased substantially, from about 30% to 80% between 2010 and 2018.
2. The exit of the last significant standalone PBM in the Part D market in 2015—Catamaran—led to increases in premiums of former clients of the standalone PBM who had to switch to using a PBM owned by a rival insurer.
3. The acquisition of Catamaran by United did not lower premiums of United enrollees. 
4. Nonvertically-integrated insurers experienced premium increases of 36% when compared to vertically-integrated insurers.

The full study can be viewed at National Bureau of Economic Research.

Gray, C., Alpert, A. E., & Sood, N. (2023). Disadvantaging Rivals: Vertical Integration in the Pharmaceutical Market (No. w31536). National Bureau of Economic Research.