The Price of Lower Price Caps: How Pharmaceutical Price Caps Affect the Supplier Landscape and Shortages

The Dutch Medicines Pricing Act (Wet geneesmiddelenprijzen, WGP) establishes price caps for medicines to control pharmaceutical expenditures. While the WGP has contributed to lower medicine costs, concerns have emerged that reduced prices may undermine supplier participation and increase medicine shortages. This study examines the relationship between price cap reductions, supplier dynamics, and medicine shortages using comprehensive longitudinal data on prescription clusters (PRKs) in the Netherlands.

We find that, over the past decade, price caps have declined, the number of suppliers per PRK has decreased, market concentration has increased, and shortage exposure has risen. Exploiting substantial price cap reductions (≥10%) and comparing affected PRKs with matched control clusters, we show that price cap decreases increase the market share in shortage by 1.34 percentage points on average, equivalent to approximately 4.9 additional shortage days per PRK per year. At the same time, price cap reductions are associated with declines in the number of suppliers and active suppliers by 1.81% and 3.00%, respectively.

These effects are particularly pronounced among low-priced, low-revenue, multi-source, and price-constrained medicines. Additional analyses reveal substantial heterogeneity across market conditions, with the strongest effects observed among medicines with limited economic margins and weaker supplier incentives. The findings remain robust across alternative identification strategies, shortage definitions, time windows, and smaller price cap shocks.

Overall, our results highlight an important trade-off between pharmaceutical cost containment and supply resilience, suggesting that pricing policies should consider their potential effects on supplier participation and medicine availability.