#publicprocurement in price regulated markets: you cannot have your cake and eat it too, Mme. Spanish Minister of Health

The Spanish press has just reported that the Ministry of Health, Social Services and Equality has mandated some pharmaceutical companies to lower the prices of certain common use drugs. This would not be in the news but for the important detail that the Ministry has adopted this decision in retaliation for the low bids submitted by those pharmaceutical companies in a centralized procurement process run by the Andalusian Health Department in 2012 (which re-run is currently taking place). 

The Spanish Health Minister was upset to see that, as a result of the centralized purchase of drugs, the Andalusian regional authorities were receiving better offers than the Ministry and other (regional) Health Authorities had managed to secure from the same pharmaceutical companies. Moreover, the prices offered in the Andalusian tender were significantly lower than those charged in the 'private' market to users whose medication is not covered by Social Security.

Instead of learning the proper lessons and exploring the potential benefits of more efficient procurement techniques (which remain to be seen in the long run, particularly in terms of sustainability of low prices, rate of innovation, protection of effective competition, etc--of which I am personally highly skeptical), the Ministry adopted a rather childish and short-sighted strategy whereby it has sought to punish the drug manufacturers by damaging their revenue stream.

In today's reported decision, the Ministry is forcing the unruly pharma companies to lower their prices for the affected drugs to levels even lower than those offered in Andalusia.  The Ministry can impose such a price reduction as part of its general regulatory powers. In my opinion, this is an enormous mistake. The use of price regulation powers as a poison pill against pharma companies that bid aggressively in public tenders is simply nonsensical.

The only message that pharma companies should take home is the following: never, ever again, compete on prices. Surely, in the immediate future, the safest position for pharmaceutical companies will be to always bid the maximum authorized price, in order to avoid a downward revision every time they offer a discount in a public procurement procedure. And, in order to protect their revenue stream, to then lobby the Ministry to protect (or raise) the level of authorized prices. 

Could one think of a worse outcome in terms of effective market competition and efficiency of public procurement? I can't. But I am sure that the Spanish Ministry of Health may surprise me in the future...