05/24/2013 05:30 EDT | Updated 07/24/2013 05:12 EDT

Bulk Buying Pharmaceuticals Isn't All It's Cracked Up to Be

Bulk purchasing of pharmaceuticals has attracted significant attention of late as Canada's provinces work to balance access to medicines and their benefits with budgetary realities. Unfortunately for Canadians, while much has been made of the potential savings, insufficient consideration is being given to the tradeoffs and risks associated with bulk purchasing agreements.

The U.S., Europe, and New Zealand have extensive experience with bulk purchasing -- experience that can help Canadians develop a deeper understanding of the benefits and risks with this new-to-Canada approach to purchasing medicines.

What is bulk purchasing? 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.

On the benefit side of the ledger, at least in direct drug purchasing costs, buyers appear to clearly benefit. The experiences of nations that use bulk purchasing show bulk purchase agreements consistently generate cost savings. These savings 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. If the savings translate into lower consumer prices, bulk purchasing may also reduce patient noncompliance thus improving health outcomes and reducing 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 in different jurisdictions.

Put simply, bulk purchasing may be employed by Canada's provincial governments to constrain escalating pharmaceutical costs with ancillary benefits.

However there's no free lunch: 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.

For example, bulk purchasing may limit, or further limit, the choice of medicines for physicians and patients if their preferred therapy (or the most effective therapy) is not covered under the new arrangement.

Also bulk purchasing agreements may accept higher prices for some medicines in exchange for deeper discounts on others. Thus patients might be able to access (or more affordably access) optimal brands/medicines in some areas of care but be forced to access less optimal brands/medicines in others.

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

Patients react differently to different medicines in terms of both benefits and side effects. Accordingly, different therapies may have negative health impacts for patients or increase the disability burden of disease. Private costs might also increase if patients choose to remain on their preferred medicine and are forced to fully cover the cost or pay the price differential between their preferred medicine and the one covered under the agreement.

Further, through delayed introduction of new innovative medicines and delayed introduction of low cost generics, bulk purchase agreements can lead to poorer healthoutcomes, additional expenditures on non-pharmaceutical forms of care, and avoidable prescription costs.

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 uncontrolledblood 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.

Bulk purchasing agreements may also result in monopolies or a limited numbers of drug suppliers. Beyond the departure of smaller manufacturers and the concentration of the domestic industry, this restricts opportunities for therapeutic substitutions and may lead to drug shortages and harm to patients.

Finally, a focus on lower prices and exerting price pressure on the pharmaceutical industry can reduce the incentives for research and development. This stifles innovation, reduces the number of breakthrough therapies in the pipeline, and diminishes incentives for incremental improvements.

While not all these outcomes are inevitable, some are and experience suggests others are highly likely. As with so many public policies, the devil is in the details. It may make some sense for provinces to join forces and negotiate better pricing for new drugs in return for greater market access. However, to the extent this approach reduces patient choice, it may lead to worse healthcare experiences and worse outcomes, without any overall savings. Further, reductions in the returns to innovation from such a policy may reduce future improvements in medical treatment.

The key question for Canadians is how much are we willing to give up in the name of cost management?

This commentary was co-written by Dr. Kristina Lybecker, a senior fellow at the Fraser Institute.

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