Alleviating Drug Shortages: The Role of Mandated Reporting Induced Operational Transparency

The ongoing shortage of pharmaceutical drugs critically threatens public health. With increasing industry consolidation, operational disruptions at a firm can lead to a nationwide shortage of life-saving drugs. In 2012, the U.S. Food and Drug Administration mandated all manufacturers to report any manufacturing interruption that can potentially cause shortages. The goal of the mandate was to mitigate drug shortages by enhancing operational transparency in the pharmaceutical industry. Subsequently, other countries such as Canada have also begun mandating reporting of interruptions to alleviate drug shortages. We leverage the policy changes in the United States and Canada to understand the impact of mandated reporting induced operational transparency on alleviating the extent of drug shortages. Using the data on time-to-recovery for individual drug-shortage incident and annual-days-of-shortage for each drug, we find that the new policy alleviates drug shortages, but its effectiveness is contingent upon the prevailing level of competition in the product category. Although the intervention is not as impactful under a monopoly, the mandate is most effective under a duopoly, and its impact wanes as competition intensifies. In the absence of the mandate-induced transparency, competition does not necessarily alleviate shortages, but with the regulation, competition can relieve drug shortages. Our results potentially offer healthcare providers and policymakers the impetus to alleviate drug shortages by mandating interruption reporting and improving operational transparency.

This paper was accepted by Charles Corbett, operations management.