Trying to force drug prices down through auctions backfired so hard that quality tanked, and patients went back to the expensive brands anyway.
March 20, 2026
Original Paper
The Cost of Cost Savings: Procurement Auctions and Moral Hazard in Drug Market
SSRN · 6412158
The Takeaway
While bulk procurement saved over $500 million in China's statin market, the 'race to the bottom' in bidding incentivized manufacturers to cut costs on production. This quality decline was so significant that it drove patients away, effectively erasing nearly 15% of the total savings the government achieved.
From the abstract
Procurement contracts are central to big buyers like governments and major corporations, but their design can generate a moral hazard problem: winning firms with ex-ante secured quantity have incentives to cut costs by reducing quality ex-post. We examine this issue in an important healthcare setting: China's volume-based procurement (VBP) of generic drugs. Using regulatory filings and novel measures of patient retention and switching, we show that procured drugs face more supplier changes and l