195 / 2024-04-23 00:51:12

Reconsidering Volume-based Drug Procurement Policy: The Consequences of Pharmaceutical Manufacturer’s Strategic Behaviors

inventory management,healthcare operations management,dynamic programming

Centralized procurement systems are widely applied to enhance the stability of drug supplies and lower expenses. In China, the government has primarily embraced a nationwide centralized volume-based procurement policy as a strategic measure to reduce the overall cost of medications. Nevertheless, the “race to the bottom” approach could potentially lead to shortages of essential medications. From an often overlooked perspective, we study how bid-winning manufacturers strategically fulfill the procurement contract to maximize their profits thus lead to potential loss of social welfare.

Considering the shortage issues caused by supply-side in China, we investigate three production modes: loyal, strategic mode 1, and strategic mode 2. When fulfilling the commitment contract, the LOYAL manufacturer supplies the bidding drug at the bidding price, throughout the planning horizon, while the STRATEGIC manufacturer maintains the capacity to produce and provide a substitute drug at a higher price. Specifically, under strategic production mode 1, the manufacturer stops producing the bidding drug and switches production lines to the substitute drug immediately after the fulfillment of the contract commitment. Under strategic production mode 2, the manufacturer decides whether to switch in every period. We characterize the structures of three production modes.

Finally, through numerical studies we show the critical role in mitigating drug shortages of balanced commitments, moderate bid prices, and substantial penalties. Our studies shed light on procurement scheme design by considering manufacturers' strategic behaviors and offer insights for improving procurement scheme design, thus potentially leading to better procurement systems to the ravages of current systems.