Drugs Procurement, Markets and Incentives – “Shortages” Drive Up Prices

One day, there will be an academic discipline around incentives. It will encompass aspects of economics, behavioural psychology and contract law. It will recognise how important incentives are in our daily personal and business lives, and in the social and political realm too.

In terms of procurement and contract management, it is always interesting to see how perverse incentives so often come into play. We remember the outsourced call centre whose staff took to ringing each other as the contract was based on a payment per call, or the accounts payable outsourcer who has no incentive to work with their client to reduce the number of invoices handled, as that affects their reward.

Another good example – although “good” is not really the word here – was reported in the Times the other day. Apparently, the UK National Health Service is paying much higher prices for certain drugs because there are “shortages”. But this looks like it may be driven really by the contractual structure. As The Times reported:

“At least 100 drugs have been affected by supply problems, forcing health officials to approve temporary price rises of up to 4,000 per cent to boost stocks. The NHS is spending more than £50 million a month overpaying for the medicines but pharmacies are still running out for days at a time and turning patients away”.

The incentive here is that under the laughably named “price concession” scheme, negotiated between the Pharma industry and the NHS, when a drug is in short supply the supplier can increase its price – “a pharmacy industry body can ask the Department of Health to grant a month of higher prices, known as price concessions, for drugs that are difficult to obtain”.

While you can see some logic behind this, a procurement person might just ask “isn’t the whole point of a contract to agree and fix the price”? Surely when the NHS agrees to authorise a drug, that is when there should be debate about pricing and in conjunction, the supplier and the wider supply chain should sign up to guarantee supply at that price up to an expected volume.

But the price increases allowed here are so significant – in one case a drug that was £1.62 is now £65 - there are suspicions that producers or wholesalers are creating artificial “shortages” to drive the higher pricing. Well, as a good capitalist, you would try to manipulate the market, wouldn’t you? That is what the design of the incentives would suggest to any ruthless operator.

Apart from the dubious ethics if this is indeed what is happening, we have to ask what the NHS and Department of Health is doing about this, and couldn’t this problem have been foreseen sooner? Just a few months ago, DH recruited a new top-level Commercial Director, Steve Oldfield, with a background in the pharma industry, as a “poacher turned gamekeeper” to manage the relationship between the NHS and the pharma supply chain.

So, over to you, Mr Oldfield - what are you going to do about this? Here’s a good opportunity for him to prove he is not just a stooge of the industry, which some unkind commentators suggested after his appointment. And as he is also part of Gareth Rhys Williams’ new Government Commercial Organisation too, presumably all those Cabinet Office skills can be brought to bear on this too.

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