GOVERNMENT INTERVENTION

Government Intervention in the big pharmaceutical Industry

Government Intervention in the big pharmaceutical Industry

Introduction

Service industries such as pharmaceutical manufacturing have become global as a result of government de-regulation; however, the Clinton Administration's proposed health care reforms would have increased regulation. Although the Administration's health care reform program did not receive adequate Congressional support in 1994, the issue is still a strong political topic. Calls for more regulation will continue to affect the industry. No matter what the outcome of heath care reform, it is expected that further regulation of the industry will force wholesalers to search for additional ways to cut costs, whether through process improvements or reductions in prices from manufacturers. As a result of government-suggested caps on drug price increases, pharmaceutical manufacturers' recently adopted self-imposed price constraints. Current price increases are limited to under 4 percent annually. Prior to 1992, drug price increases averaged over 10 percent a year. Wholesalers traditionally made much of their profit by purchasing drugs prior to the effective date of announced price increase, and then selling those drugs at their newly established prices. With self-imposed price increase caps of no more than 4 percent, the wholesalers' forward purchasing advantage has been all but eliminated, thereby severely cutting into their profitability. This discussion will assert that government regulation of the pharmaceutical industry is necessary to ensure that market flaws or failures do not lead to undesirable consequences of the public, and to promote the social and political interests of the broad public.

The American pharmaceutical industry is changing. Over the past ten years, the industry has been barraged by societal, legislative, structural, competitive, and technological changes, and today it is at the center of national debate. With health care costs escalating, much of the blame has been directed at the pharmaceutical industry. Compounded by an aging population, the increasing popularity of drug therapy, rapid technological advances, and the shifting of primary medical care out of the hospital, competitors at all levels of health care delivery are altering their strategic directions in an attempt to become more efficient. Like many service sectors, the pharmaceutical industry in the mid- 1980s was a highly differentiated industry, based on branded and patetited pharmaceuticals, and was stable and profitable. Yet, in less than 10 years, forces have essentially restructured the entire health care delivery system into a cost-driven industry with lower profits at all industry levels (Agarwal, Gupta & Dayal, 2007). The demand for lower-cost delivery of drugs and services by managed care organizations has caused customers to become more price-sensitive. The search for lower-cost prescriptions, coupled with the shift from branded to generic drug prescriptions and the reclassification of many prescriptions to over-the-counter drugs, has created a price-restrictive environment for manufacturers and has forced distributors and retailers to contain or reduce their costs.

The traditional pharmaceutical value-chain from manufacturer, through wholesalers and retailer/hospitals, to the final consumer is undergoing a metamorphosis into an increasingly efficient structure. Technological advances, threats of increased regulation, and business, governmental, and public cost-containment pressures have ...