Creative compliance in pharmaceutical markets: the case of profit controls

Abstract

This article discusses the issue of creative compliance in pharmaceutical markets. In particular, we explore the case of profit controls in the UK as an indirect way of regulating prices of in-patent originators. We study creative compliance in the presence of profit controls, rather than price controls or the Pharmaceutical Price Regulation Scheme in general. We use lessons from the accounting literature to explain firm behavior and reveal potential weaknesses in profit control regulation and use data to show changes in trends following the introduction of this policy. We demonstrate that in the presence of profit controls there is an incentive for producers to increase costs (leading to inefficiencies) or to inflate reported costs. We find some evidence that the behavior of pharmaceutical firms in the UK may have changed as a result of the introduction of profit controls. Although the evidence is in line with what we would expect to occur as a result of creative compliance, establishing a concrete causal relationship between such a pricing policy and costs is not possible. As institutions or organizations look to achieve legitimacy for their actions, they will use the tools they have, whether accounting or regulatory, to best represent themselves.

Keywords::

• creative compliance
• pharmaceuticals
• profit controls
• regulation

Acknowledgements

The authors are grateful to Wim Van der Stede, Yuval Millo, Elena Nicod, Georgina Blanco-Mancilla, the Editor of the journal and four anonymous referees for their comments and suggestions. All outstanding errors are our own.

Financial & competing interests disclosure

The authors have no relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript. This includes employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.

No writing assistance was utilized in the production of this manuscript.