Mitigating the U.S. Drug Shortages Through Pareto‐Improving Contracts

Abstract

Drug shortages have been a major challenge facing the US pharmaceutical industry and government in recent years. Although the problem has drawn tremendous attention from the government and media, limited academic research has been devoted to this problem, and few solutions have been proposed based on rigorous research. This study addresses the drug shortage problem from a supply chain perspective, a key aspect missing in the literature, and proposes to mitigate shortages through drug purchase contracts. By modeling the drug supply chain, we capture the objectives of various supply chain parties, and investigate Pareto‐improving contracts that mitigate drug shortages, improve drug manufacturer's and group purchasing organization (GPO)'s profits, and cut government spending and healthcare providers’ costs. We explore structural properties of key supply chain decisions and the Pareto‐improving contracts, and conduct scenario analysis with realistic industry data to evaluate shortage mitigation solutions. Our analysis shows that increasing drug prices only, a solution advocated by many, is not very effective in shortage mitigation. Price increases must be paired with strengthened failure‐to‐supply clauses (called the IPS approach) to achieve consistent and significant shortage reduction as well as Pareto improvement. Across all scenarios tested, a 30% price increase under IPS can lead to a minimum, average, and maximum shortage reduction of 25%, 53%, and 70%, respectively. Our analysis also shows the impacts of IPS on different parties in the supply chain and the impacts of various model parameters on shortage mitigation. The IPS approach rewards reliability of drug supply, which is in line with the FDA's strategic plan to reward quality, but is easier to achieve in this regulation‐based industry. Interactions with the government and industry practitioners indicate that IPS also challenges the current mindset in pharmaceutical contracting.

New regulatory strategies to manage medicines shortages in Europe

“…Considering such critical issues and the latest position papers of stakeholder associations (Various Associations, 2019a,b), the establishment of harmonized metrics to classify the impact of medicine shortage on the National Healthcare Systems is a mandatory step to enhance the cooperation among competent National Authorities of the European countries and to rationalize the efforts to mitigate them. Regulators and professional associations have proposed several systematic measures to assess shortage problems (Beck et al, 2019;Bochenek et al, 2018;EMA, 2019c;Jia and Zhao, 2017;Panzitta et al, 2017;PDA, 2014). However, the proposed strategies are generally designed to face a specific shortage's root cause (e.g., manufacturing failures, low price, distribution-problem).…”

“…Medicine prices are cited among the causes of shortages worldwide (Jia and Zhao, 2017;Bochenek et al, 2018;Heiskenen et al, 2017;De Weerdt et al, 2015b;Dave et al, 2018). Indeed, especially for low-price medicinal products, the market competition may affect the economic sustainability of the MAHs significantly, decreasing their manufacturing capacity and resilience to demand fluctuation.…”

“…The application of economic incentives to MAHs has been proposed as a solution to prevent shortages. For example, Jia and Zhao demonstrated that a price increase of 30% results in a significant reduction of risk of shortage in the US market (Jia and Zhao, 2017). However, a similar approach cannot be fully applied in the EU, considering the fragmentation of the European price and reimbursement policies (WHO, 2018).…”

“…However, as Jia and Zhao demonstrated (Jia and Zhao, 2017), the efficacy of the regulatory incentives in preventing shortages is also linked to the creation or the strengthened of failures-to-supply clauses for MAHs in the reimbursement agreements. These strategies permit to improve MAH sustainability and to ensure a proper supply for the patient demand.…”

“…Medicine shortages have risen worldwide, straining the capability of National Healthcare Systems in ensuring patients' access to pharmacological therapies (Beck et al, 2019;Jia andZhao, 2017, Schwartzberg et al, 2017). The resilience of the pharmaceutical distribution chain and other stakeholders varies based on different factors, such as product characteristics and the involved countries (Birhli, 2013).…”