The following article from the fall 2014 issue of Changing Business, the research magazine of the Johns Hopkins Carey Business School, looks at Assistant Professor Stacey Lee's research on shortages of certain cancer drugs and antibiotics. She argues that as shortages worsen, manufacturers should be given incentives to maintain production levels while turning a healthy profit.
Reported cases of drug shortages in the United States have almost quintupled in the past five years, at great cost in both dollars and patient health. In 2011, 99.5 percent of 820 hospitals surveyed experienced at least one shortage during the previous six months, with resulting administrative costs adding up to an estimated $216 million per year. Sixty-nine percent of physicians reported having had to treat patients with a less effective drug because of a shortage, and 35 percent of patients experienced an adverse outcome as a consequence.
Recent federal measures have emphasized quality controls and stronger requirements for manufacturers to notify the Food and Drug Administration (FDA) about anticipated shortages. But these approaches focus on the shortages’ symptoms and miss the point, says Stacey Lee, an assistant professor at the Johns Hopkins Carey Business School. The underlying cause of shortages is an economic one, and the only way to counter the shortfalls is to make it profitable for pharmaceutical manufacturers to maintain drug production levels, says Lee.
In “The Drug Shortage Crisis: When Generic Manufacturers ‘Just Say No,’” forthcoming in the Oregon Law Review, Lee argues that there is no free market in the health care industry, so traditional principles of supply and demand don’t work to address the shortages’ root causes. Instead, she proposes creating incentives for manufacturers to enter the market, stay in the market, and expand capacity.
In a typical supply-and-demand scenario, when demand for a product goes up, manufacturers respond by raising prices and flooding the market. But a lack of elasticity in supply and demand within the pharmaceutical industry puts prescription drugs in a different class, severely limiting potential profits for their manufacturers, Lee writes. The government controls reimbursement rates for prescription drugs through the Medicare payment system, preventing prices from following demand. Moreover, the majority of drugs that account for the shortages are generic sterile injectables — mainly cancer drugs and antibiotics — whose production requires unique facilities and equipment that include a sterile environment with dedicated lines. Given the large investment required, the long waits for FDA approval, and the high odds of low returns, manufacturers are left with little incentive to develop the infrastructure to meet heightened demand. Instead of investing in updated equipment or adding to their facilities, existing manufacturers run aging equipment at higher volumes — raising the chances of a breakdown — and potential manufacturers stay out of the market.
Today’s shortages can be traced to 2009, when the FDA turned its attention to facility deficiencies that were causing drug-quality issues, after more than 80 deaths were linked to contaminated heparin, a sterile injectable used as a blood thinner. The agency tripled the number of site inspections, which led to simultaneous temporary closures of several manufacturers. Since only a handful had been producing heparin, the closures essentially halted the drug’s production.
After this incident, President Obama and the FDA successfully backed legislation requiring manufacturers to track and report anticipated shortages. But these laws have resulted in costly upgrades and suspended operations, further limiting profitability and virtually shutting down the sterile-injectable supply.
While the quality issues were real, Lee says, a more thoughtful approach could address those challenges and still enable production to continue.
One solution that has been put forward is changing the government reimbursement process so as to allow manufacturers to adjust their prices. Such a bill was introduced in Congress but stalled in committee, and similar measures are unlikely to win approval in the near future, Lee writes.
What manufacturers need are reasons to increase capacity while maintaining quality — both to enter the market and to expand facilities to meet surges in demand. Lee proposes creating incentives around those goals. Manufacturers should be able to collaborate with the FDA to establish voluntary production and quality levels in exchange for customized incentive packages matching their business plans and their place in the production cycle, she suggests. Examples could include tax incentives and rebates, vouchers for expedited FDA product reviews, and a “Good Housekeeping”-type seal of approval that would boost a manufacturer’s reputation in the marketplace.
Drug shortages matter because they strike at the heart of our access to medicine, so government should be able to compel production, Lee contends.
“It’s a new definition of ‘shortage,’” she says. “It’s not like the ingredients aren’t available, and it’s not like there isn’t a demand. It’s just not in manufacturers’ financial interest to produce these drugs. That America’s health is dependent on a lucrative bottom line, and the government is prevented from altering those business decisions, is very troublesome.”
— Rachel Wallach