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Understanding the US Pharmaceutical Supply Chain through FFS Contracts and Drug Shortage Mitigation

Date：2015-06-29 From：

TIME： 10:00am

July 3, 2015

PLACE：25A-3B

SPEAKER：Prof. Hui Zhao，The Pennsylvania State University

TITLE：Understanding the US Pharmaceutical Supply Chain through FFS Contracts and Drug Shortage Mitigation

Abstract:

Drug shortages have posed significant public health threat in the U.S. in recent years. Although this 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 the supply chain perspective, a key to the problem but missing in the literature, and proposes to mitigate shortages through supply chain contracts (in particular, drug purchase contracts). By modeling the drug supply chain pertaining to shortages, we capture the most challenging aspect of the problem - the involvement of and unique relationships among multiple parties. We derive structural properties of key decisions and characterize Pareto-improving contracts that mitigate drug shortages, improve drug manufacturer's and GPO's profit, and maintain/cut government spending and providers' costs. We further conduct numerical analysis with realistic industry data. Our results show that increasing drug prices only (IP approach), a solution much advocated nowadays, is not effective in shortage mitigation. Price increases paired with strengthened failure-to-supply clauses (IPS approach), however, can achieve consistent and significant shortage reduction as well as Pareto improvement: across all parameter sets tested, a 30% price increase under IPS can lead to a minimum, average, and maximum shortage reduction of 25%, 53%, and 70%, respectively. The analysis also shows the impacts of IPS on different parties in the supply chain and the impacts of various model parameters on shortage mitigation. IPS rewards reliability of drug supply and in turn lowers shortage risks, which is in line with the FDA's strategic plan to reward quality, but is much easier to achieve in this regulation-based industry. The authors were invited to US Department of Health and Human Services and FDA in Washington DC to present this work.

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