Solving the growing drug shortages
Until government price controls are lifted, the makers of generics will be unable to cover their production costs

Article Highlights

  • Until government price controls are lifted, generic drug makers won't be able to cover their costs

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  • Washington's policy prescription should be to unwind harmful regulation creating drug scarcities

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  • Obama's solution to #drug shortages ignores impact of price regulations

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Widening shortages of some essential injected drugs for chemotherapy and other treatments are leaving vulnerable patients without the medicines they need. So far, Washington's response will only reinforce the problem. Its policy prescription should instead be aimed at unwinding the regulations that created these scarcities in the first place.

The problems have affected mostly older sterile, injected (parenteral) drugs that are generic and typically sold at low prices for slim profit margins. More than 200 drugs are on the current shortage list kept by the American Society of Health-System Pharmacists. The shortages have caused patients to miss or delay chemotherapy or to get inferior antibiotics, anesthetics and intravenous nutrition.

President Obama blames the shortages on the paucity of manufacturers for these products. He says slim profit margins mean few firms want to make these drugs. This analysis ignores the significant impact that price regulations have had on the economics of parenteral-drug production. So does the president's solution.

On Oct. 31, Mr. Obama signed an executive order that, most notably, requires firms to give advance notice when they believe a drug may soon become scarce. But all this will do is institutionalize shortages by tipping off hospitals and market middlemen to buy up remaining supplies.

A dwindling number of competent manufacturers aren't the cause of the problem; they're its symptom. Branded drugs have only a single manufacturer, and they aren't facing the same problems.

"To fix this, we should lift existing price controls when it comes to critical injectable drugs that are generic."--Scott Gottlieb, M.D.

A handful of adept companies can supply these markets. Yet in recent years, the Food and Drug Administration (FDA) has gotten tough on snafus that have long plagued injectable generic drugs (such as sterility problems or metal shavings getting into solutions).

These are valid concerns, and with its vigilance heightened, the FDA has required manufacturers to undergo major plant renovations, suspend facilities or stop shipping goods from suspect production lines. Yet the FDA and the manufacturers often don't understand the drug-production processes well enough to detect the root cause of problems. Instead of calling for targeted fixes of troubled plants, the agency has often taken a very costly shotgun approach that requires upgrades virtually everywhere.

The bigger problem is that manufacturers can't easily raise prices to meet the resulting increased costs of production. A 2003 law fixes the price Medicare will pay for injected drugs to an "average sales price" that is at least six months old at any given time. This flawed concept means even if a generic firm raises its price to reflect increased production costs, the new price won't get paid by Medicare—meaning purchasers would be losing money for months at a time. The result is that generic prices can't rise to reflect changing demand or the need for bigger investments in manufacturing.

Branded drugs have faced similar production (and FDA) issues, and they are paid for under the same flawed scheme. But they have larger profit margins to offset the cost of plant upgrades. Among the generics makers—whose much smaller profits have been eroded away by production costs—more and more are choosing to exit product lines rather than invest money to meet steadily higher standards.

To fix this, we should lift existing price controls when it comes to critical injectable drugs that are generic. First, Medicare can be directed to ditch the flawed "average sales price" and reimburse manufacturers for these drugs according to the price that is paid by wholesalers on the open market and already reported to Medicare. Then generic firms could adjust prices to match rising production costs and meet demand.

These drugs should also get a holiday from other Medicaid price-control schemes that serve to distort market prices. Sen. Orrin Hatch, the ranking member of the Senate Finance Committee, is working on a legislative proposal to ease the regulatory and pricing burdens facing this market.

Better still, Medicare can move the reimbursement of these drugs from its price-controlled "Part B" scheme and into its "Part D" drug program, which already pays for the pills that senior citizens get from pharmacies. Part D is run like a real marketplace, where drug makers compete to sell their medicines to large purchasers.

Allowing generic injectables to be priced competitively would allow manufacturers to recoup the costs of production and bring shortages to an end.

Scott Gottlieb, M.D., is a resident fellow at AEI

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