Abstract
Growth in pharmaceutical prices is a major policy issue in the United States. Competition is encouraged to counteract such growth, yet less is known about the effect of brand competition on prices. We discover a unique feature of this market by studying the pricing strategies of incumbent drug manufacturers under tiered-insurance anticipating branded competition. Using the insulin market as a natural experiment, we exploit exogenous variation in several potential entrants' completion of clinical trials to identify the effect of drug pipeline pressure on the prices of incumbent drugs. We find that pipeline pressure exerts cumulative and significant upward pressure on prices of incumbent drugs. In the insulin market such pressure explained 10.5% of the growth of prices. We were able to replicate these findings among incumbents with other emerging biosimilars. Insurance designs that fail to promote price competition through negotiations and value-based principles may contribute to such price increases.
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