Preferred Pharmacy Networks: Health Care Savings on the Margins

While policymakers have talked a lot recently about finding a comprehensive fix for escalating health care costs, such as Medicare-for-all, many economists have been exploring the possibility that the answer for excessive health care spending may rest instead in series of smaller adjustments. This issue brief presents research on one such small fix: preferred pharmacy networks. This is a relatively new tool whereby health insurers aim to steer consumers to lower cost “preferred” pharmacies, where insurers are able to negotiate lower drug prices. The research concludes that preferred pharmacy contracting results in a roughly 1 percent decrease in Medicare Part D drug costs among plans utilizing this tool—a fact that should be encouraging to policymakers concerned about reigning in costs, especially in light of other research demonstrating that health care consumers do not shop around for lower priced care. If this practice of “steering” consumers toward lower cost drugs were applied to the entire pharmaceutical industry, the savings could be much greater.