Management Science and Information Systems' Seminar（2016-07）

Topic:Understanding the US Pharmaceutical Supply Chain through FFS Contracts and Drug Shortage Mitigation

Abstract:

Pharmaceutical industry is vital for healthcare and economy of any nation. However, research on the pharmaceutical industry is scarce, possibility due to its complexity and lack of data. Pharmaceutical industry is also a unique industry, with many features of its own and many problems difficult to solve. Pharmaceutical industry is always heavily regulated, with its advance always touching policy making.

In this talk, I plan to discuss the essence of two of my research projects on two challenging questions facing the US pharmaceutical supply chains to give the audience a good understanding of the US pharmaceutical industry, a fairly complex and mature industry compared to that of many other nations in the world. I hope the results will bring insights and inspiration for many others to look at this important industry in China as well. The first project is about Fee-for-service (FFS) contracts for brand drugs and the second one is about mitigating drug shortages, a worldwide problem.

Fee-for-service (FFS) contracts, first introduced in 2004 in the US, dramatically changed the way the pharmaceutical distribution supply chains are designed, managed, and operated. In spite of its widespread popularity, the industry has never reached consensus on the effectiveness of FFS contracts and there has always existed contentions in contract parameter negotiation. Through supply chain modeling, we show the impact of FFS on the supply chain and each player of the supply chain, capture the range of the Pareto-improving contract parameters, and propose simple yet effective heuristic for computing them. We also demonstrate that supply chain transparency facilitated by the FFS contracts can significantly reduce the manufacturer’s supply–demand mismatch costs. Our results have been used for real negotiation of FFS contracts to improve the efficiency of pharmaceutical distribution supply chains, thus have the potential of reducing the healthcare costs that are such a big burden on the U.S. economy.

Drug shortages have posed significant public health threat in the U.S. in recent years and the number of drugs on shortage has reached 456 in 2012. One of the most challenging aspects of drug shortages is the involvement of multiple parties with objectives in different domains (e.g., social welfare, profitability, reimbursement). In this study, we model the drug supply chain pertaining to shortages and propose Pareto-improving contracts that mitigate drug shortages, improve drug manufacturer's and GPO’s profit, and cut government spending and provider costs. Considering the overlooked weak failure-to-supply (FTS) clauses in this industry, our proposal features strengthened FTS clauses paired with reasonably increased drug prices. Our results show that our proposal can achieve consistent and significant Pareto improvement, e.g., an average of 54% shortage reduction under a 30% price increase and corresponding FTS clause enhancement. The analysis also shows the impacts of our proposal on different parties in the supply chain and the impacts of various model parameters on shortage mitigation.

Introduction:

Dr. Hui Zhao is an Associate Professor of Supply Chain Management and Charles and Lilian Binder Faculty Fellow at the Smeal College of Business of the Penn State University. Her research focuses on collaboration in decentralized supply chains, information sharing, and supply chain contracting. Most of her recent work has been in the area ofpharmaceutical and healthcare supply chains. As one of the early researchers into the pharmaceutical supply chain area, Zhao has conducted extensive research including Fee-for-service contracts and information sharing in pharmaceutical distribution, capacity planning and outsourcing for pharmaceutical manufacturing, drug shortage, drug innovation policy/regulations, and specialty drugs investment and distribution strategies. She has also worked with top pharmaceutical companies and pharmaceutical analytics company. Zhao’s research has appeared in top journals such asManagement Science, Operations Research, MSOM,POMS,Naval Research Logistics, IIE Transaction on Healthcare, and EJOR. She was also invited to write a book chapter on “Supply Chain Optimization in Healthcare”, in the book of Advances and Trends in Optimization with Engineering Applications, to be published by SIAM.

Your participation is warmly welcomed!