RESPOND (Resilience Enhancement Strategies for Pharmaceuticals Optimizing Differentiation)
Pharmaceutical supply chains have become extremely vulnerable to disruptions. This especially applies to the Netherlands, where 5 out of 13 million medicine users were affected by medicine shortages in 2023. This is attributed to price-focused regulations and procurement practices that pressure manufacturers' margins, resulting in market exits and insufficient investment in supply chain resilience. The Dutch government is implementing two key interventions to address this: mandating minimum stock levels (creating an “iron stock” or “ijzeren voorraad”) and revising maximum price policies. These measures aim to enhance supply resilience and the earnings capacity of supply chain actors (to prevent them from exiting the market) but can strongly increase holding costs and prices, and thereby decrease drug affordability.
The key to improving supply resilience and supply chain actors’ earnings capacity without strongly decreasing affordability lies in tailoring these policies. Different medicines vary in price, margin, revenue, disruption risk, and supplier alternatives, making a “one-size-fits-all” policy ineffective. Tailored policies – specifying different minimum stock levels and different approaches for determining maximum prices for different categories of medicines – even have the potential to create win-win-win outcomes: better supply resilience, improved affordability (by saving costs of shortages and avoiding unnecessary stocks), and fewer market exits (by decreasing holding costs and increasing earnings potential for medicines for which this risk is high).
The project aims to develop differentiated policies for maximum prices and minimum stock levels that are simple enough for practical implementation. We do so through four work packages:
• In WP1.1, we will use stakeholder interviews to understand the feasibility, costs, and benefits of different levels of policy tailoring, which will inform constraints and objectives for optimizing tailored policies in WP2.1.
• In WP1.2, we will use a staggered difference-in-difference model to quantify how the policies affect resilience, affordability, and earnings capacity, using data on medicines and shortages in the Netherlands. The data and findings will be used to develop a policy impact model that estimates the effects of minimum stock levels and maximum prices on supply resilience, affordability, and market exits.
• In WP2.1, we will use the insights from WP1.1 and the policy impact model from WP1.2 to model and solve the problem of optimizing policy tailoring. The goal is to maximize the tailored policy’s effectiveness – the extent to which it improves the mentioned three objectives – while limiting the policy’s level of complexity. We will formulate this as a mixed-integer linear programming (MILP) problem and develop and test exact and heuristic algorithms to solve this.
• In WP2.2., we will evaluate tailored policies in terms of supply resilience, affordability, and earnings capacity and develop an Excel-based plug-and-play tool which stakeholders can use to evaluate differentiated policies.
The project will suggest specific tailored policies for minimum stock levels and maximum prices, but also propose a methodology and blueprint that can be used for the tailoring of other policies affecting pharmaceutical supply chains, such as those on failure-to-supply penalties, tendering (preferentiebeleid), and insurance coverage limits (GVS). In 2023, the pharmacy supply chains serving pharmacies alone (i.e., excluding hospitals) generated €5.4 billion. We expect that smart tailoring can reduce holding costs for the industry and shortages by 20% and the likelihood of market exits among low-revenue articles by at least 50%.
The project will build upon the partners’ extensive expertise, data, and prior research on drug shortages, and will fill a gap in research, which focuses on uniform or product-specific policies and has so far overlooked the need for simple tailored policies. Findings will be valorized and disseminated through a range of outputs and activities, including annual seminars, policy briefs, presentations at practitioners conferences, policy development iterations, academic publications, and the development of an Excel-based plug-and-play tool for tailored policy evaluation. Dissemination will not only focus on the Dutch pharmaceutical sector, but also on other countries (vertical scaling) and other supply chains impacted by government policies (horizontal scaling) – to maximize the project’s impact.
