ZLC Seminar Series: "Analyzing the effects of contract and structural design in health care supply chains"

Gerardo Pelayo Rubio, Mustafa Çagri Gürbüz
MIT-Zaragoza International Logistics Program, Zaragoza Logistics Center, Spain

Abstract
Balancing access to needed medicines against escalating costs is one of the most challenging tasks in health care system design and reform. From 2000 to 2008, the average growth in the per capita spending on pharmaceuticals for Organisation for Economic Co-operation and Development (OECD) countries was almost 60%. The trade-off is particularly present in the introduction of new drugs aimed at treating chronic conditions where list prices proposed by the pharmaceutical manufacturers tend to be high in order to recoup their investment, sometimes contrasting with a lack of robust evidence regarding the cost-effectiveness of the treatment at the time when price is negotiated; moreover, such cost-effectiveness may vary across a drug's different indications, i.e., for different patient groups. In this setting, we analyze the interaction between pharmaceutical manufacturers and health-payers to answer, on top of a variety of more specific situations, the following questions:

• How are access and service level decisions determined under different contracting scenarios under demand and health outcome uncertainty?
• What is the role played by absolute and relative budget constraints? 
• What is the effect of each contract design on health care spending and patient welfare? 
• Is it in the interest of pharmaceutical manufacturers to create different products for different types of patients?

By applying game theory and stochastic optimization techniques, we analytically find critical thresholds and propose simple heuristics to facilitate the decision-making process for health-payers with different objectives and understand the trade-offs in choosing a particular contract or structural design against another.