To Help or Not to Help: A Game-Theoretic Analysis of Regulation GPOs' Price-Ceiling Policy

A group purchasing organization (GPO) aggregates healthcare providers' demands to negotiate better deals on their behalf with medicine manufacturers, which is believed to be helpful in reducing procurement cost. However, this belief has typically been based on a one-time procurement context while underestimating manufacturers' countermoves to GPOs' efforts. In fact, manufacturers can raise prices or update to new products to undermine GPOs' cost-saving efficiency. We investigate how a Regulation GPO (who applies a price-ceiling policy to establish an upper limit for medicines' prices) influences procurement outcomes when manufacturers react strategically under the multi-cycle procurement context. Our analysis shows that a Regulation GPO is still no guarantee to reduce procurement costs. We find that only through tough price control, a Regulation GPO could achieve its cost-saving target. Meanwhile, a moderate level of price control could lead to worse procurement outcomes. What's more, reducing cost and improving utility, the two primary targets of contemporary Regulation GPOs, can be either consistent or contradicting with each other, which requires trade-off during the policy-making process. Unexpectedly and interestingly, we find that minor innovation may hurt patients' utility compared to the no innovation situation under the current procurement mechanism, suggesting that not all innovation should be encouraged. Our analysis also shows that, contrary to the common belief, Regulation GPOs do not always decrease manufacturers' profit (which provides innovation resource). In addition, we provide several other managerial insights that could be useful for both GPOs and policy-makers.