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Bulk Drug Purchasing Is Too Good to Be True

08/03/2013 07:06 EDT | Updated 10/02/2013 05:12 EDT

As part of their struggle with budget realities and the growing cost of health care, Canada's provinces continue to work on bulk purchasing agreements for pharmaceuticals as a way to save money. Unfortunately, the recent release from the Council of the Federation (the council of Canada's premiers) suffers from the typical one-sided approach that characterizes much of the drug policy discussion. Yes, there are up front savings to be had. But there's no such thing as a free lunch.

Bulk purchasing agreements seek to reduce per unit costs of medicines by increasing the volume purchased by a conglomerate of purchasers. In Canada, this means provincial governments join forces to purchase medicines in higher volumes in pursuit of price reductions from manufacturers.

While this approach is new to Canada, the extensive experience with bulk purchasing in the U.S., Europe, and New Zealand provides a deeper understanding of both the benefits and risks associated with this policy approach.

What is clear from their experience is that bulk purchase agreements appear to consistently generate cost savings. These range from modest to quite impressive depending on the specifics of the strategies in use, sophistication of the plan, size of the program, and historic purchasing patterns.

There are also potential ancillary benefits. If these savings translate into lower consumer prices, they have the potential to reduce patient noncompliance (not following the prescription regime). That can improve health outcomes and reduce the use of other healthcare resources. To the extent bulk purchase agreements standardize formularies, they may also contribute to greater equity in terms of the medicines available across Canada.

But the news is not all good: These savings and benefits come with risks and tradeoffs. Implementation of bulk purchasing agreements and their interaction with other cost containment initiatives (such as reference pricing, therapeutic substitution, preferred drug lists, etc.) may negatively impact patients, and ultimately prevent the initiative from reducing overall expenditures.

Critically, patients react differently to different medicines in terms of both benefits and side effects. This means different therapies may have negative health impacts for patients or increase the disability burden of disease. Many of the drawbacks with bulk purchasing relate to this fundamental medical reality.

Bulk purchasing agreements may limit or further limit the choice of medicines for physicians and patients if their preferred therapy (or the most effective one for them) is not covered under the new arrangement.

Frequent renegotiation of bulk purchase agreements (perhaps annually) may also lead to abrupt changes in treatment for patients if the therapies covered by the agreement change.

Bulk purchasing agreements might also accept higher prices for some medicines in exchange for deeper discounts on others. This means patients might be able to access (or more affordably access) optimal medicines in some areas of care but be forced to access less optimal medicines in others.

There may also be consequences for private costs if patients choose to remain on their preferred medicine and are forced to fully cover the cost or pay the price differential between it and the one covered under the agreement.

Indeed, the New Zealand experience shows that bulk purchasing in combination with approaches such as therapeutic substitution and preferred drug lists, resulted in poorer care for some patients including increased prevalence of uncontrolled blood pressure, deteriorated lipid control, and worsened cardiovascular health. Overall, studies find that New Zealand's approach negatively impacted both the disability burden and health outcomes, generated higher patient costs, and shifted utilization to other more invasive, costlier treatments.

More broadly, the delayed introduction of new innovative medicines and delayed introduction of low cost generics that may result from bulk purchase agreements can lead to poorer healthoutcomes, additional expenditures on non-pharmaceutical forms of care, and avoidable prescription costs.

Beyond these direct impacts are other concerns.

Monopolies or limited numbers of drug suppliers may be another consequence of bulk purchasing agreements. This restricts opportunities for therapeutic substitutions and may lead to drug shortages and harm to patients, not to mention the departure of smaller manufacturers and concentration of the domestic industry.

Finally, a focus on lower prices and exerting price pressure on the pharmaceutical industry can reduce the incentives for research and development. With new innovative medicines taking 15 or more years in development and approval, with a cost of around $1 billion each, such price pressure diminishes incentives for innovation and incremental improvements.

While not all these outcomes are inevitable, some are and experience suggests others are highly likely. While provincial governments promise savings from bulk purchasing agreements, its record in practice suggests the costs might be considerable.

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This piece was co-written by Kristina M. Lybecker, associate professor of economics at Colorado College and Fraser Institute senior fellow.

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