Part 2: Paying Less for Prescription Drugs? Bad Idea


This is the second article of a three-part series (part 1, part 3).

For the past few years, a proposal has been gaining favour with political decision makers as a way of containing pharmaceutical expenses, that of purchasing prescription drugs in bulk.

Last summer, during the meetings of the Council of the Federation, provincial representatives announced their intention to adopt a national drug procurement strategy through competitive tendering for the purchase of six generic drugs. Although the provinces have since rejected the idea to go ahead with such a policy given its multiple flaws, it is still being defended by those who believe a more centralized and regulated prescription drugs market is the model to follow.

This strategy, currently used in the hospital sector, rests on a relatively simple principle. The buyers―whether they are hospitals, pharmacies or governments―solicit bids for the purchase of several drugs from interested suppliers. For each drug, a supply contract is signed, often with an exclusive supplier. By implementing this kind of collective process, the buyers hope to enjoy greater bargaining power with pharmaceutical companies, which should generally allow them to obtain better prices.

Paying less for drugs sounds like a good idea, right? Well, as with everything else, one needs to look at the whole picture and see what he gets in return. With regards to bulk purchasing, although there might be some savings initially, it is clear that the long-term disadvantages of such a policy outweigh its short-term benefits.

First and foremost, this practice of resorting to a single supplier entails the risk of compromising access to required drugs for many patients, insofar as it would limit their chances of obtaining alternative drugs designed by other manufacturers. It could also restrict doctors’ ability to prescribe other drugs that they consider more effective in meeting their patients’ needs. By underestimating the fact that patients do not all react the same way to particular medicines, this approach may therefore unnecessarily expose some of them to the risk of worsening health.

Furthermore, such a practice is likely to push numerous manufacturers to gradually leave the market. Experience teaches us that bulk purchasing processes generally lead to greater concentration in the production of drugs, with a limited number of manufacturers sharing the market for each type of drug. In Canada, excessive use of this procurement method in the hospital sector is one of the reasons why Sandoz, the company blamed for the severe shortage of injectable drugs experienced in early 2012, became the sole supplier of more than 60% of all injectable drugs dispensed in Canadian hospitals.

At the international level, the dangers of purchasing drugs in bulk and of granting sole-supply contracts are increasingly recognized, the practice having been called into question in several countries.

Criticisms were raised in New Zealand, where centralized bulk purchasing processes entailed numerous unintended consequences. As a recent study revealed, many hospitals observed a drop in the quality of the products and services obtained and deplored the absence of choices available to them, following the implementation of such a policy. Drug shortages proved to be common, and some of them took over a year to be resolved. The centralized procurement practice coincided with only modest savings (6-8%), some of which “might have occurred regardless of the strategy,” the authors admitted.

Moreover, there is no guarantee that buying drugs in bulk leads to overall savings in the health system, once total costs are taken into account. By forcing patients to change their medicine for the one offered by the unique supplier, there is a risk that such a policy will lead to adherence problems or more serious side effects and thus generate other expenses elsewhere in the health care system.

In Denmark and Germany, for instance, it was observed that compliance fell for patients who were forced to switch to other drug types. In these countries, the tendering system also slowed the development of generic medicines and led to a decrease in pharmaceutical investments in R&D. In Belgium, cost reduction goals were not met, and the sole-supply policy was quickly abandoned.

In the end, we find that the presence of a single buyer (monopsony) in a market entails unintended consequences just as harmful as the presence of a single seller (monopoly). When applied to generic drugs, the practice of centralized bulk purchasing clearly increases the risk of drug shortages without generating the anticipated savings. By extending it to cover innovative drugs, decision makers would risk discouraging investment in R&D and inhibiting innovation.

Hence, all things considered, we realise that there is no free lunch with bulk purchasing: paying less means… getting less.

Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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