The Formulary Game

Abstract

This paper presents a descriptive model that highlights the essence of what pharmacy benefit managers (PBMs) do in managing certain formulary choices made by their clients. These choices are affected by market share rebates offered by drug manufacturers. We have found that a model based on simple game theory provides key insights into the behavior of PBMs. Formalizing exactly how PBMs behave may be useful in examining complex legal and accounting questions that turn on characterizations of behavior.Our model highlights the essence of what PBMs do in managing formulary choices affected by MSRs. Their act of initializing formulary choice with a national formulary of their own design is an act of a principal. It represents discretionary behavior on the part of the PBM. Once this is done, the act of translating average rebate schedules into marginal schedules is the act of a good dual agent and service provider. Market share rebates move markets not by closing formularies but by closely aligning formularies. We think that this formalization of how PBMs manage certain formulary choices may be useful in dealing with several legal and accounting issues that turn on characterizations of PBM behavior.