Government Provides the Wrong Prescription for Drug Shortages

Recent shortages of high profile drugs have brought this issue back into the news, and with it the predictable efforts of well-intentioned lawmakers to do something about it. Unfortunately, the ideas being proposed by these policy makers fail both to address the root cause of shortages and will do little to stem their growing tide, and they may even make matters worse. The prescription, unfortunately, is something anathema to many lawmakers: market prices.

A class of drugs known as “sterile injectables,” reimbursed under Medicare Part B, make up the lion’s share of shortages, the most notable of which are the cancer drugs paclitaxel and cytarabine. Given that the consequences of such shortages are often public and tragic, bipartisan legislators this week have advocated a series of steps to address the problem: (1) require manufacturers to give advanced notice of impending shortages, (2) require FDA to review manufacturer requests to expand production capacity on an expedited basis, and (3) crack down on the “grey markets” that have risen in response to shortages.

FDA and DEA policies tightly control the production capacity of drug manufacturers. Though ostensibly intended to protect quality, any supply chain disruptions have the unintended consequence of disturbing the delicate balance of supply and demand. With FDA review of production capacity increases sometimes measured in years, the ability of manufacturers to rapidly respond to fluctuations in market demand is extremely limited.

Merely requiring FDA to more rapidly assess company responses to predictable market disruptions will do little to alleviate their root cause. Sterile injectables are expensive to both manufacture and store, and if it becomes unprofitable for a company to do so, they will simply stop. Federal law requires that drugs reimbursed under Medicare Part B be limited to 106% of the average sales price (ASP) of the drug over the last six months. This means that any short-term uptick in demand necessitating the expenditure of greater production resources by the manufacturer cannot be met by the increase in price necessary to cover these costs. Consequently, they don’t happen.

Further, mere early warning of an upcoming shortage does nothing to stop it from happening. When hospitals know that an important drug may face supply disruption they stock up, or “hoard.” In addition to meeting their own needs, this allows distributors to sell off a portion of their supplies once a shortage develops, albeit at a marked up rate. Mandating advanced notice is akin to giving the Duke brothers from Trading Places the buy signal, and cracking down on these “grey markets” means that still more people will be left without any access to lifesaving drugs, marked up or otherwise.

Rather than these intermediate measures, what is needed is true reimbursement reform that lifts these price controls and allows the supply for these all-important drugs to match demand. As a start, this should mean reimbursing such drugs via private Medicare Part D plans that have better managed costs and access over time, rather than the more tightly regimented Part B. Second, given the costs and complexity associated with manufacturing and storing such drugs, 340B rebates, which require drug manufacturers to give discounts to outpatient facilities that treat a high number of Medicaid patients, should be reduced to reflect that fact. Under the 2010 health reform legislation, this will include nearly one-third of U.S. hospitals. Ultimately, what is needed is a common sense approach that allows for a more rapid adjustment of supply to demand.

There is an often-told tale of Soviet inefficiency that notes that, given the distortions of central planning, the supply of undershirts was often excessive, while more essential items were extremely scarce. Unfortunately for us, the unintended consequences of our own policies have ignored undershirts and gone after life saving drugs instead.

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