Drug Price Differentials Caused by Formularies and Price Caps

This paper analyses the behaviour of drug firms facing the threat of having their drugs excluded from the formulary of health care providers. The paper obtains two main results. One is that drug firms offer discounts to health care providers to avoid going off-list when competing in a free-entry monopolistically competitive setting, and that discounts obtained by health care providers do not cause prices to rise outside managed care. The second result is that price caps affect how prices evolve over time. Drug firms set higher introductory prices, but raise these less dramatically over time, when health care providers find it increasingly difficult to off-list older drugs.Drugs, Discounts, Formularies, Price Caps,