The Market Design for Formulary Positions

TL;DR

This paper models the process of allocating formulary positions through a multi-round auction, providing a linear assignment framework based on net prices and expected demand to optimize rebate exchanges.

Contribution

It introduces a novel linear assignment model for formulary position auctions, capturing the complex rebate and demand interactions in a structured mathematical framework.

Findings

Developed a linear assignment model for formulary position auctions

Captured rebate exchanges and demand expectations in the model

Provided insights into optimal auction design for formulary placements

Abstract

The exchange of rebates for formulary positions is conceptualized as a multi-round combinatorial position auction. This paper develops a linear assignment model of the winners' determination equation of this auction where the bases are net unit prices after unit rebates and expected demand.