Prescription for Savings? Disclosure in the Drug Market

The market for prescription drugs in the United States is complex and rising costs are cause for concern. Recent regulatory efforts to rein in drug prices have targeted pharmacy benefits managers, or PBMs. These opaque middlemen negotiate with drug makers on behalf of health plans and hence hold private information about the true cost of drugs. I study the effectiveness of two types of disclosure regulation in reducing drugs costs for patients and health plans: disclosure from PBMs to other firms in the drug market (inter-firm disclosure) and disclosure from PBMs to government regulators. I find inter-firm PBM disclosure increases prescription drug costs for health plans but decreases costs for patients. Cross-sectional tests reveal the effect depends on the specific user of the disclosure: health plans use PBM disclosures to negotiate lower costs for monopoly drugs, while drug manufacturers use PBM disclosures to minimize aggressive discounting for competitive drugs, leading to higher costs. I find no average effect of PBM disclosure to regulators, but cross sectional tests reveal a decrease in drug costs in areas of increased regulator attention. My results suggest PBM disclosure regulation can affect prescription drug spending by billions of dollars in a single year, providing timely evidence for regulators and policy-makers as they address rising drug costs.