Olivia Zhao
Dissertation Title: "Economics of Prescription Drugs: Innovation, Payment, and Prescribing"
The pharmaceutical industry is an important sector in U.S. healthcare, with prescription drug expenditures accounting for $467 billion (9% of health care expenditures) in 2024. The industry has been a prominent target of policy reforms due to increasing burdens on households in accessing prescription drug treatments. At the same time, pharmaceutical innovation has been responsible for tremendous improvements in life expectancy and quality of life.
This dissertation explores three issues related to prescription drugs: innovation, payment and benefit design, and prescribing. Each project concerns a different stage of the pharmaceutical supply chain, and they all carry implications for how policymakers understand the potential and limitations of policies intended to promote patient access to medications.
Chapter 1, co-authored with Edward Kong and titled “Policy Incentives for Pharmaceutical Innovation,” studies how policy can strengthen incentives for development and subsequently increase the level of innovation for specific types of drugs. Pharmaceutical firms’ incentives to develop new drugs stem from expected profitability. This project explores how market exclusivity, a policy that shapes these expectations, influences pharmaceutical innovation. First, we estimate the effects of extending market exclusivity for antibiotics, a drug class where private returns to development historically had not internalized the high social value of new innovation. Using a difference-in-differences approach, we find that a policy that approximately doubled the market exclusivity period for certain antibiotics increased innovative activity. Patent filings for antibiotics increased by 47%, and we find suggestive evidence that preclinical studies and phase 3 trial initiations also increased under the policy. Building on these empirical findings, we estimate a structural model of firms' drug development decisions to predict how market exclusivity extensions of varying lengths would affect innovation in antibiotics and other therapeutic areas. Our reduced form and structural findings suggest that market exclusivity—especially if targeted to high-social-value, low-market-return areas—can be an effective tool for realigning incentives and stimulating innovation, but stress that baseline market size and interactions between market and patent exclusivities affect this policy lever's impacts.
Chapter 2, co-authored with Leemore Dafny, studies copay maximizers, a new type of benefit design typically applied to high priced drugs where manufacturers’ assistance for patient cost-sharing is available. Manufacturers of high-priced drugs typically offer coupons or other forms of financial assistance (“patient assistance programs”) to defray out-of-pocket costs for privately insured patients using their medications. In recent years, many employer-sponsored plans have responded to rising drug spending subsidized by manufacturer-sponsored programs by adopting “copay maximizer programs,” which report inflated out-of-pocket costs and collect larger sums from patient assistance programs. We examine the determinants of the annual assistance caps set by drug manufacturers, as well as the impact of a maximizer program implemented in 2021 by a large employer with approximately 39,000 covered lives. We find that assistance caps increase with drug prices, consistent with manufacturer profit maximization. The scope of the maximizer program is substantial: although fewer than 2 percent of enrollees use targeted drugs, nearly half of the employer’s drug spending was on those drugs, and the amount collected from patient assistance programs in the year of implementation covered over 13 percent of that spending. Using a difference-in-differences approach comparing drug utilization among affected enrollees with a matched sample of enrollees in the same state taking the same drugs but enrolled in plans without maximizers, we find no evidence that the maximizer program adversely affected continuing users’ drug adherence or the likelihood of new starts.
Chapter 3, co-authored with Anna Sinaiko and titled “Prescribing with Price in Mind: Effects of Price Transparency on Out-of-Pocket Spending and Prescribing,” studies how an informational intervention that provided clinicians with real-time information on patient out-of-pocket (OOP) cost obligations for prescription drugs affected prescribing patterns and realized OOP costs for patients. Cost-sharing on prescription drugs can present meaningful barriers to patient access and adherence to prescribed treatments. Even for prescribers who would take cost-sharing into consideration when making therapeutic recommendations, limited knowledge of encounter-specific factors like a patient’s benefit design or deductible spending make it difficult for prescribers to incorporate OOP costs in their decisions. One possible solution is real-time benefit tools (RTBTs), which operate at the time of prescribing by displaying OOP costs for medication orders and possible therapeutic substitutes with lower OOP costs. We studied the 2019 implementation of an RTBT on antihyperglycemic prescribing at a large academic health system. Using a difference-in-differences design comparing prescribers exposed to the RTBT to other prescribers in the same state, we causally estimated a $1.55 decrease in monthly OOP cost per prescription following RTBT implementation, representing an 8.7 percent decrease. Decomposing this aggregate result into different prescribing patterns, we found that the result is entirely driven by reductions for insulin prescriptions, with no detectable changes in prescribing patterns across antihyperglycemics subclasses or within non-insulin subclasses. We interpret this as evidence of the potential for RTBTs to lower OOP spending, but caution that RTBTs may not be uniformly successful at achieving savings for patients across the wide range of therapeutic areas represented in most clinical settings.