Stocking Under the Influence

...but adoption rates have been low.

Biosimilars are to biologic drugs as generics are to small molecule drugs. Recent legislation has facilitated the entry of these copycat products, which are typically significantly cheaper than the originator biologics. 

Medicare has coverage rules and policies that generally encourage the use of biosimilars. However, adoption rates have been low on average.

From conversations with hospital executives, we heard the conjecture that commercial insurance coverage is partly to blame. 

1. Biosimilars are not covered as much in commercial insurance

2. Hospitals like to stock one product to earn exclusive discounts (and for ease of logistics)

3. Hospitals don't like stocking products for which their patients are not insured

4. Medicare patients end up showing up at facilities that exclusively stock the originator

The first part bears out in our data, where biosimilars are covered for ~70% of commercial patients whereas originators are covered for over 90% of commercial patients.

We use an institutional feature of drug markets, national formularies, to construct a shift-share instrumental variables design. 

The argument is as follows:

1. National formularies are set by large PBMs at the national level

2. Different states have different exposure to each PBM

3. This creates significant variation in commercial insurance coverage

4. We can then look at variation in state-level shares, controlling for detailed drug-by-state and drug-by-year FEs.

5. We find significant responses in Medicare utilization in response to commercial insurance shocks.

To present some more graphical evidence, we also conduct informal "event studies" around big state shocks in commercial insurance (w/ Medicare market share of the originator as the outcome).