How to Fix the National Drug Shortage

The Times reported in November that the United States is experiencing a record-breaking drug shortage. Thousands of patients are facing delays getting cancer treatment, a drug to reverse lead poisoning, the sterile fluid required to stop the heart during bypass surgery, and antibiotics for the strep. One doctor called the shortages a national emergency.

In a free market, shortages of this nature would be rare and only temporary if at all. Profit motives would encourage existing suppliers to increase production, and new ones to enter. The Food and Drug Administration instead lists 137 drugs as 'currently being in short supply'. This shows that there is a need for some type of medicine to fill the gap in the market.

What is wrong? Low prices, i.e. low prices paid to generic drug and biosimilar manufacturers, are a major part of the problem. They have such thin profit margins that it is not worth investing in production. Some have shut down.

It's difficult to believe that the low price of drugs is causing problems, but it does. Anthony Sardella is a Washington University business adviser who told a House Hearing last month, according to the Times article, that generic drug prices have fallen by 50 percent in 2016. Sardella stated that 'low prices come at a price'.

At a recent congressional hearing, Dr. Robert Califf said, 'If you were offered the opportunity to manufacture a drug and I guaranteed that you would lose money with every pill you produced, you are unlikely to enter this business'. If you are already in business, Dr. Califf said that 'you may also be tempted to cut corners on quality systems and manufacturing'

Califf continued, "So we've got to fix core economics to get this situation fixed." He said that other solutions such as improved data sharing are only plugging gaps.

Why do generic drug manufacturers charge such low prices? The main reason is that they are under pressure from powerful wholesalers, buyer representatives and other buyers. I'm going to concentrate on group buying organizations that negotiate prices for drugs and medical supplies on behalf hospitals and nursing homes. They curate the list of products which customers order.

They're not as well-known as pharmacy benefit managers but are similar in many ways. Both organizations negotiate drug pricing on behalf of customers. Both have a few big players who dominate. Both have attracted the attention of antitrust and congressional investigators.

But their customers are different. Pharmacy benefit managers decide on behalf of insurers and other payers which drugs will be covered and how much. The majority of their coverage is for brand-name medications sold by pharmacies. In contrast, group purchasing organizations represent hospitals, nursing home and other institutions. They negotiate discounts for generic drugs, biosimilars and medical supplies, such as saline solutions, needles and bandages, and CT scanners. The majority of business is dominated by three companies: Vizient Premier and HealthTrust.

A drug manufacturer has little choice but to use one of these groups to supply a nursing home, hospital or other institution. For access to their customers, the manufacturers pay a fee to the group buying organization. Fees paid by manufacturers would normally be illegal kickbacks according to the federal anti-kickback laws. In the 1990s, the Department of Health and Human Services determined that a ban on payments would inhibit some potentially advantageous arrangements. So it granted immunity to group buying organizations so long as they adhered to a list of anticorruption rules.

The group buying organizations' critics are enraged by this safe harbor. Phillip Zweig told me that it was the biggest scam I've ever seen in America. In the 1990s, both Zweig and myself wrote for BusinessWeek. Sara Sirota, of the American Economic Liberties Project (which has joined Zweig’s organization and other organizations in asking the F.D.A. The Federal Trade Commission and I have been told that the payments of fees create an unavoidable conflict of interest, and should be reversed.

Critics claim that the organizations use their market power to demand high fees and low prices, reducing the profit margins of manufacturers to the point that it is barely worth the effort. Akorn Pharmaceuticals, the only active domestic supplier of liquid albuterol for use by hospitals in treating asthma, shut down its production earlier this year and filed for bankruptcy.

Critics say that group buying organizations' aggressive bargaining is one of the main reasons why a large portion of the generic drug manufacturing that was in the United States moved overseas, especially to India. India has lower production costs. Some Indian manufacturers are good, but many are corrupt and sloppy. Regulators have not done much to shut them down or clean them up. Bloomberg's April analysis of India's pharmaceutical industry revealed that 'its cough syrups caused the deaths of dozens of children in the previous six months', and "its eye drops led to blindness."

Todd Ebert is the president of Healthcare Supply Chain Association (the trade group for group purchasing organizations). I asked him for his reaction to critics. He said that studies showed the fees his members collect from manufacturers 'do not affect the prices of products'. He said that they represent an average of around 2 percent of product prices. "When we sit with our clients, they don't complain about the safe harbour" from prosecution regarding the fees.

Ebert says that manufacturing errors are the main cause of shortages. He said that group purchasing organizations were determined to prevent shortages. He said the organizations ensure that their customers are buying safe drugs.

Subodha Kumra, an expert in group purchasing organizations and a professor of statistics, operations, and data science at Temple University’s Fox School of Business told me that drug shortages could be an unintended, but occasional side effect of how the organizations try to keep prices down for their customers - the hospitals and nursing home. They force the manufacturers to give them exclusive rights or priority in supply. It is difficult for manufacturers to assist other buyers who suddenly run out of stock. The group purchasing organizations offer their customers, the health care institutions, financial incentives to only do business with them. This can become a problem when the source of the organization runs out.

Kumar stated that regulators should sit down to decide on how to retain the good parts of G.P.O.s while eliminating the bad ones, or to at least implement checks and balances.

Antonio Ciaccia told me that group buying organizations are a great way to save money and ensure a steady supply for nursing homes and hospitals. He said that the bad side is that "when someone is given power to act as a gatekeeper there are many opportunities to use that power in ways which do not benefit consumers."

I will conclude with a quote by Virginia Republican Representative Morgan Griffith who spoke at an hearing last month of the Oversight and Investigations Subcommittee that he chairs. This is part of the House Committee on Energy and Commerce. He said, 'Our economic environment is so unappealing for manufacturers that only one or two companies produce lifesaving drugs worldwide. They are often sold at unsustainable prices. This needs to be changed.

The Readers Write

Alabama extended the work requirement for parents with children aged 6 to 11 months. What would the cost of child care be if a family member was not available to take care of the child? Who would pay for it? What is the role of parents in early childhood? This is coming from a party that promotes 'family values'.

Gerald Turkel
Newark, Del.

You wrote: "The survey found that 66% of Americans stopped using or used less product because of inflation." This was me, in a nutshell. We who shop for groceries each week continue to witness gouging. This leads to anger and helplessness. The only way to show that we will not be gouged by 'them" is to never buy the product again.

Robin Kennedy
Columbia, Mo.

Contrary to what you claim in your newsletter, "too much printing of money" does not make it harder to control inflation. The size of the deficit relative to the level of current economic activity can cause inflation, by adding to an economy which may be already near capacity. Another common assumption is that printing money causes inflation. This needs to be challenged.

Nick Estes
Albuquerque, N.M.

You're welcome. It was something I read years ago, and it's stuck with me ever since. Heinlein has helped me tackle many projects and endeavors with confidence.

Providence Forge (Va.)

Quote of the day

The inherent vice of capitalism lies in the unequal distribution of blessings. Socialism's virtue is equal distribution of miseries.

Winston Churchill's speech to the House of Commons on October 22, 1945