By MacKay Jimeson
Drug shortages can be a matter of life and death. Sometimes, a shortage may simply require patients to temporarily pay a higher price or shop around to different local pharmacies to find one that has their prescription in stock. But, in the worst cases, a shortage means patients are entirely unable get access to a potentially lifesaving drug at any price.
As the father of a child with asthma, few things are more frightening than a potential shortage of critical generic medications like albuterol.
Albuterol is among the top ten most prescribed medications in the United States. It is a staple for doctors and hospitals treating patients with breathing problems. Unfortunately, albuterol has been in short supply since summer 2022 and has been on the U.S. Food & Drug Administration’s (FDA) Drug Short List since last October.
Until recently, Akorn Pharma manufactured a liquid form of albuterol hospitals use as a continuous nebulizer treatment. After two years in bankruptcy and several more years operating at a financial loss, the company closed shop in March, leaving the U.S. with just one remaining domestic supplier of liquid albuterol.
Most of the time, my nine-year-old son can self-manage his asthma. But, at least once a year, he will run into my bedroom, unable to breath and desperate for help. On these nights, even though we have albuterol at home, we rush him to the emergency room where he receives multiple doses until he can return to normal breathing.
Any threat to the supply of this essential medication casts at least some degree of uncertainty on the care patients like my son will receive during an emergency. Sadly, our country’s drug supply problems extend far beyond albuterol.
Over the past two years, new drug shortages in the U.S. increased by almost 30 percent, impacting nearly 300 essential treatments. In some cases, demand for these medications is high and manufacturing costs are relatively low. But, because profit margins for producing many lifesaving generic drugs are historically thin, lagging production – and the resulting shortages – have become all too common.
For some medications, supply-chain complications may arise due to heavy reliance on ingredients from places like China and India. However, in many other instances, the greatest threats to the supply of essential drugs are closer to home.
Group purchasing organizations (GPOs) – one of many middlemen created by our overly complex healthcare system – are often the culprits behind U.S. drug shortages. Every year, GPOs are responsible for more than $250 billion in hospital purchases, with the top three controlling 90 percent of the market. They typically award contracts to manufacturers with the lowest price drugs and receive rebates from drug companies for including specified products in their catalogs. If a pharma company offers a large enough rebate, a GPO might offer them exclusive contracts.
This has distorting effect on the market, particularly when it comes to generics.
The idea behind our regulatory system for generic drugs is that having a larger number of manufacturers competing in the market for a particular medication will naturally drive down costs while ensuring high quality. However, the GPO-led push for bottom-dollar pricing – along with restricted competition for manufacturers offering sizable rebates – turns this dynamic on its head.
Generics manufacturers that are unable to turn a profit with artificially low prices and unfair restrictions market access will typically exit the market entirely. The result is a much less competitive marketplace that relies on a smaller number of manufacturers. And, with fewer manufacturers, the risk of a shortage is substantially higher.
So, where is the government in all this?
In 2019, the FDA issued a report laying out the impact of this crisis and potential solutions. The Biden White House published a supply chain resilience report that included pharmaceutical manufacturing in mid-2021. Earlier this year, the Senate Homeland Security Committee issued a report specifically focused on drug shortages.
In other words, Washington has produced several studies and reports on this problem, but, not surprisingly, very little action has been taken. Meanwhile, more and more manufacturers either shutter production on key generics or go out of business entirely.
Admittedly, there are some good ideas in these various reports. For example, if GPOs wanted to be a proactive part of the solution, they could start with two recommendations from the FDA report. This would include setting contracts to ensure manufacturers earn a sustainable, risk-adjusted return to incentivize ongoing investments in producing essential medications. GPOs could also reward quality investments by offering higher payments for drugs manufactured in top-rated facilities or conditioning contracts on companies maintaining a specific quality maturity rating.
However, as the shortage crisis has been growing for more than a decade, it is hard to imagine GPOs will change course now.
So, the administration and Congress must act.
A good place to start would be to realign economic incentives. Under current law, GPOs are essentially immune from prosecution under federal anti-kickback laws. Congress could pass straightforward legislation to eliminate this safe harbor, particularly when it comes to Medicare programs.
Congress and the administration could also provide some relief by fixing the Medicaid Generics Penalty. In the 2015 Bipartisan Budget Act, Congress applied the same penalties used to control price increases for brand-name medicines to low-cost generic drugs. However, in a competitive, multi-source generics market, prices are often as low as 70 percent below the cost for the original reference drug. When base prices are that low, even a small price increase can appear disproportionately high as a percentage. This reinforces the artificial price ceiling on some generics and can add instability to the market over time.
Whatever solutions policymakers want to consider, one thing is clear: Our drug shortage crisis is largely the result of an unhealthy and unsustainable business environment for generic drug manufacturers. GPOs have significant leverage and they are not shy about using it. Using predatory purchasing power and one-sided contracts, GPOs create unnecessary operating challenges for drug manufacturers, especially those lacking the necessary investment capital and multiple lines of business that will let them compete in an unfair marketplace. It is a recipe for disaster that is playing out in real time and put lives, like my son’s, at risk.
MacKay Jimeson is the executive director of the Patient Access & Affordability Project at Patients Rising. He was previously an executive at Pfizer and an aide to former Florida Governor Jeb Bush.