Strategic horizontal integration for drug cost reduction in the pharmaceutical supply chain

Recent increases in prescription drug prices have drawn the attention of lawmakers and the media. A 2018 report from the US Department of Health and Human Services indicated that prices of brand drugs increased six times faster than inflation from 2011 to 2015. Even the presence of generics may not reduce prices effectively. Over the last five years, Medicare spending on brand drugs increased by 77% even as usage fell (NBC News, 2018). Several studies also indicate that certain therapeutic classes of drugs are becoming expensive and may result in a long-term financial impact on Medicare Part D. This research considers how coordinated, drug-specific partnerships between independent chain and mail-order pharmacies may be leveraged to reduce drug costs and/or increase supply chain profit. Specifically, we develop an optimization model to determine how many and which of a chain pharmacy's regions should be set up to handle mail-order demand of particular drugs under the objective of maximizing total profit to the partners. Computational results illustrate the value of such partnerships for drug cost reduction and highlight the extent to which a unified effort can generate additional profits for both parties and thus impact pricing for click-and-collect customers.