Donald Trump’s remarks around creating “new bidding procedures for the pharmaceutical industry because they’re getting away with murder”, may have knocked US pharmaceutical stocks, but whether there is a procurement business case for putting more medication tenders to the market is debatable, says Jonathan Webb, supply chain contributor for Forbes.com
The President-Elect’s January 11 comments appear to single out poor procurement techniques as the chief contributor for creating a ‘disastrous’ drug sector.
“[T]here’s very little bidding on drugs. [The US is] the largest buyer of drugs in the world, and yet we don’t bid properly. And we’re going to start bidding and we’re going to save billions of dollars over a period of time,” said the President-Elect.
A lower price is not always a better price
As seasoned supply chain watchers and procurement enthusiasts are keen to point out: tendering is not the only answer to sourcing goods. Undoubtedly, it is an excellent technique to lower price. But tendering is best applied to ‘commodified’ markets of relatively similar goods.
Other purchases, such as complex service contracts, are more difficult to place in a price-focused tender. The output is harder to specify and price becomes a less reliable measure of quality.
The position of drugs upon this spectrum of complex to commodified markets is debatable. Although certain drugs are well-studied with clear effects, their overall impact upon patients is not always guaranteed. Moreover, the buyer is not buying the drug itself, but the clinical outcome.
The actual subject of a tender is the change in an individual’s quality of life. Here, we enter a difficult, even philosophical, discussion regarding the value of a person and the improvements of a patient’s life chances.
To simplify the process, economists use the term ‘quality-adjusted life-year’ or QALY in order to measure the effect of a medical intervention upon a person over the course of a single year.
QALYs and other quality measures can be brought to bear in tenders in order to enrich the procurement officer’s understanding of a drug and its impact. Such practices can be deployed in order to identify ‘best value’ and not simply race to the bottom for the cheapest product.
This is not to say that tenders or prices are inappropriate components of deals, nor to absolve big pharmaceuticals of any criticism. In fact, there is much evidence to suppose there are wide variations in the prices that government health authorities pay in public tendering as a result of ‘divide and conquer’ tactics by healthcare salesmen.
However, a single-minded focus on reducing price can lead to some unwanted outcomes. If you incentivise buyers to seek out the cheapest, they may procure drugs that deliver sub-optimal results for patients. Moreover, suppliers aware of the drive for lower prices, save margin in other areas, such as reduced post-contract support and care.
Adapted from an article that first appeared on Forbes.com