Advertisement

The European Journal of Health Economics

, Volume 15, Issue 5, pp 477–487 | Cite as

The effects of rebate contracts on the health care system

  • Julia GrafEmail author
Original Paper

Abstract

Group purchasing organizations gain increasing importance with respect to the supply of pharmaceutical products and frequently use multiple, exclusive or partially exclusive rebate contracts to exercise market power. Based on a Hotelling model of horizontal and vertical product differentiation, we examine the controversy around whether a superior rebate scheme exists, as far as consumer surplus, firms’ profits and total welfare are concerned. We find that firms clearly prefer partially exclusive over multiple, and multiple over exclusive rebate contracts. In contrast, no rebate form exists that lowers total costs per se for the consumers or maximizes total welfare.

Keywords

GPOs Rebate contracts Vertical differentiation 

JEL Classification

I11 L13 L42 

Notes

Acknowledgments

I am very grateful to Christian Wey, Jürgen Zerth, Clémence Christin, Irina Suleymanova and the participants in the DIBOGS seminar 2011 as well as to two anonymous referees for many helpful comments and suggestions.

References

  1. 1.
    Blue Cross and Blue Shield Companies Give Their Distinctive Mark to Quality, Efficient Hospitals Chicago (2013)Google Scholar
  2. 2.
    Blue Cross and Blue Shield of Illinois Drug Formulary Chicago (2013)Google Scholar
  3. 3.
    Brekke, K., Koenigbauer, I., Straume, O.: Reference pricing of pharmaceuticals. J. Health Econ. 26(3), 613–642 (2007)PubMedCrossRefGoogle Scholar
  4. 4.
    Bundesministerium für Gesundheit: Pressemitteilung— Überprüfung des Preismoratoriums und der gesetzlichen Herstellerabschläge für Arzneimittel, Berlin (2012)Google Scholar
  5. 5.
    Burns, L., Lee, J.: Hospital purchasing alliances: utilization, services, and performance. Health Care Manag. Rev. 33(3), 203–215 (2008)CrossRefGoogle Scholar
  6. 6.
    Chen, R., Roma, P.: Group buying of competing retailers. Prod. Oper. Manage. 20(2), 181–197 (2011)CrossRefGoogle Scholar
  7. 7.
    Dana, J.: Buyer groups as strategic commitments. Games Econ. Behav. 72(2), 470–485 (2012)CrossRefGoogle Scholar
  8. 8.
    Elhauge, E.: The Exclusion of Competition for Hospital Sales through Group Purchasing Organizations. Harvard Law School, Cambridge (2002)Google Scholar
  9. 9.
    Ellison, S., Snyder, C.: Countervailing power in wholesale pharmaceuticals. J. Ind. Econ. 58(1), 32–53 (2010)CrossRefGoogle Scholar
  10. 10.
    Greenlee, P., Reitman, D., Sibley, D.: An antitrust analysis of bundled loyalty discounts. Int. J. Ind. Organ. 26(5), 1132–1152 (2008)CrossRefGoogle Scholar
  11. 11.
    Hotelling, H.: Stability in competition. Econ. J. 39(153), 41–57 (1929)CrossRefGoogle Scholar
  12. 12.
    Hovenkamp, H.: Competitive Effects of Group Purchasing Organizations’ (GPO) Purchasing and Product Selection Practices in the Health Care Industry. Prepared for: The Health Industry Group Purchasing Association (2002)Google Scholar
  13. 13.
    Hu, Q., Schwarz, L.: Controversial role of GPOs in healthcare-product supply chains. Prod. Oper. Manag. 20(1), 1–15 (2011)CrossRefGoogle Scholar
  14. 14.
    IMS Health Market Prognosis, May 2012 Frankfurt (2012)Google Scholar
  15. 15.
    Inderst, R., Wey, C.: Buyer power and supplier incentives. Eur. Econ. Rev. 51(3), 647–667 (2007)CrossRefGoogle Scholar
  16. 16.
    Kolasky, W.: Group purchasing organization (GPO) contracting practices and antitrust law. Prepared for: The Health Industry Group Purchasing Association (2009)Google Scholar
  17. 17.
    Kolay, S., Shaffer, G., Ordover, J.: All-units discounts in retail contracts. J. Econ. Manag. Strateg. 13(3), 429–459 (2004)CrossRefGoogle Scholar
  18. 18.
    Leutgeb, R., Mahler, C., Laux, G., Ärztenetz Weschnetz, Szecsenyi, J.: Krankenkassen-Rabattverträge: Probleme und Risiken für den Hausarzt bei der Betreuung chronisch kranker Patienten. Deutsche Medizinische Wochenschrift 134(5), 181–186 (2009)Google Scholar
  19. 19.
    Lindsay, M.: Antitrust and group purchasing. Antitrust 23(3), 66–73 (2009)Google Scholar
  20. 20.
    Marvel, H., Yang, H.: Group purchasing, nonlinear tariffs, and oligopoly. Int. J. Ind. Organ. 26(5), 1090–1105 (2007)CrossRefGoogle Scholar
  21. 21.
    Miraldo, M.: Reference pricing and firms’pricing strategies. J. Health Econ. 28(1), 176–197 (2009)PubMedCrossRefGoogle Scholar
  22. 22.
    OECD Health Data 2012—Frequently Requested Data. WHO Global Health Expenditure Database Paris (2012)Google Scholar
  23. 23.
    Schlesinger, H., von der Schulenburg, M.: Search costs, switching costs and product heterogeneity in an insurance market. J. Risk Insur. 58(1), 109–119 (1991)CrossRefGoogle Scholar
  24. 24.
    Schneller, E.: The Value of Group Purchasing—2009: Meeting the Need for Strategic Savings. Study conducted by: Health Care Sector Advances, Arizona (2009)Google Scholar
  25. 25.
    Snyder, C.: Why do larger buyers pay lower prices? Intense supplier competition. Econ. Lett. 58(2), 205–209 (1998)CrossRefGoogle Scholar
  26. 26.
    Tyagi, R.: Why do suppliers charge larger buyers lower prices? J. Ind. Econ. 49(1), 45–61 (2001)CrossRefGoogle Scholar
  27. 27.
    Weizsäcker, C.: The costs of substitution. Econometrica 52(5), 1085–1116 (1984)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Düsseldorf Institute for Competition Economics (DICE)Heinrich-Heine-Universität DüsseldorfDüsseldorfGermany

Personalised recommendations