Article: Monday 26 October
There’s a limit on prices for many medicines. In many countries, pharmaceutical companies are not allowed to just choose the selling price and there’s a price cap for each medicine.
Low price caps help keep medicines affordable, but they are also coupled to effects like fewer suppliers and more frequent shortages.
This was documented by Dr Harwin de Vries and post-doctoral researcher Dr Yao Liu from Rotterdam School of Management, Erasmus University (RSM), with Dominik Gutt of RWTH Aachen University, when they studied how decreases in the price caps for medicines have affected the market in the Netherlands over the past decade.
They have already discussed their findings with policymakers from the Dutch Ministry of Health and other healthcare stakeholders as part of an ongoing update for the Dutch Drug Prices Act. Their research, The Price of Lower Price Caps: How Pharmaceutical Price Caps Affect the Supplier Landscape and Shortages is published as a pre-print version on SSRN (originally the Social Science Research Network).
Patients need medicines to be both affordable and available, and this research provides evidence that can help balance prices with supply security.
The findings have important implications for healthcare policymakers, showing that a ‘one-size-fits-all’ pricing policy may not be the best approach, said Dr De Vries. “Medicines that are already inexpensive or don’t generate much revenue may need more lenient price caps to reduce the risk of shortages and supplier exits, especially when alternative price-control mechanisms are already present, for example competitive tendering.
Downward pressure on prices may push suppliers to reduce costs by decreasing inventories, scaling down production capacity, delaying maintenance, or cutting back on quality control investments. What’s more, when one supplier has a shortage, other suppliers may be less willing to bring in their supplies when prices have been pushed down.
A second concern is that lower price caps weaken the business case for serving a market, prompting suppliers to exit the market or become commercially inactive. “Part of the reason is that being active in a country with low price caps can have negative implications for revenues in other markets. We wanted to understand this impact so policymakers can make better-informed decisions,” said Dr De Vries.
The researchers analysed nationwide market data for Dutch generic medicines over the past decade. First, they examined how price caps, the number of suppliers, market concentration, and shortages changed over time. Then they compared medicines that had experienced large reductions in the price cap with otherwise similar ‘twin’ medicines that had not had price cap reductions to discover what happened afterwards.
They observed that over the past decade, price caps have fallen, the number of suppliers per medicine has declined, market concentration has increased, and medicine shortages have increased. They also found that when a medicine's price cap is reduced by 10 per cent or more, shortages increase by an average equivalent of nearly five extra days per year – around a 32 per cent increase in shortages – and the number of suppliers declined. The effects are strongest for low-priced, low-revenue generic medicines supplied by multiple manufacturers, where shortages increased by almost 11 extra days per year.
Their findings have important implications for healthcare policymakers. The ‘one-size-fits-all’ pricing policy may not be the best approach, said Dr De Vries. “Medicines that are already inexpensive or generate little revenue may need more lenient price caps to reduce the risk of shortages and supplier exits, especially when alternative price-control mechanisms are already present, for example competitive tendering.”
And for healthcare insurers and procurement professionals, he says price is important, but so is the security of supply. The impacts on both need to be considered in decision-making and policymaking.
Read the full article here: The Price of Lower Price Caps: How Pharmaceutical Price Caps Affect the Supplier Landscape and Shortages on SSRN (originally the Social Science Research Network).
Science Communication and Media Officer
Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top-ranked business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become to become critical, creative, caring and collaborative thinkers and doers.
