On Monday, President Obama “took action” and issued an Executive Order called Reducing Prescription Drug Shortages. Whew! Glad he fixed that problem!OK, not really. I'm glad the President is focusing attention on this public health catastrophe. Alas, this PR-friendly move will have only a limited direct effect on shortages. The President basically told the FDA to work harder, but didn’t provide any new enforcement tools or authority.
On the bright side, Monday’s flurry of activity did provide two useful background reports on the supply chain dynamics behind shortages. Together, these reports provide a compelling, but in my opinion incomplete, explanation for why the supply chain for generic injectable drugs is so fragile. Most notably, the Obama administration's prescription ignores the fact that the reduced return on investment from generic injectable manufacturing has quite predictably reduced the level of investment.
Read on and see if you agree.
HOW SHORTAGES HAPPEN
Two worthwhile background reports were issued at the same time as the Executive Order. These are must-read documents if you want to truly understand the generic injectable supply chain and distribution system.
- Economic Analysis of the Causes of Drug Shortages
- A Review of FDA's Approach to Medical Product Shortages
- There are very few manufacturers for any individual injectable drug, demand is growing rapidly, and highly-specialized manufacturing capacity can’t be quickly increased in the short-run.
- Any supply shock to the system, such as a manufacturing problem, can rapidly create a shortage because alternative capacity can’t ramp up to meet demand.
The FDA is taking positive action to prevent shortages or lessen their impact. The FDA’s Drug Shortage Program (DSP) helped to prevent 38 drug shortages in 2010 and 99 to date in 2011. Here’s how they did it:
Each report highlights the market concentration in the generic injectable market. In 2010, the top five generic injectable manufacturers accounted for 80% of the packages/bottles/vials sold in the U.S. market by volume and 73% of the dollars in sales. Contrary to popular belief, concentration has decreased slightly over time. (See pages 30-32 of the FDA report for more.)WHAT’S MISSING
As I see it, both reports fall short by ignoring the economic market factors that create such a narrow supply base. Investment incentives matter because the FDA cannot compel a company to manufacturer a generic injectable drug. Here are three major culprits:
- Low reimbursement for mature generic injectable drugs reduces the incentive for a manufacturer to enter the market. One likely cause is 2005's introduction of the Average Sales Price (ASP) methodology, as illustrated by the profit timeline shown in Profits from Generic Injectables: Too High or Just Right? Yesterday's Wall Street Journal editorial The Bush-Obama Rx Shortages pins the blame unambiguously on ASP.
- Large GPOs and wholesalers “pick the winners” when awarding sole- or dual-source contracts, driving prices down and encouraging concentration. While this is logical and sensible cost-saving behavior, these power buyers inadvertently make the generic injectable market financially unattractive for manufacturers. Put another way, short-run gains for buyers has created a long-term problem for the health-care system.
- Lightly-regulated gray market wholesalers speculate on products in limited supply, driving up prices to healthcare providers (a la Drug Shortages and Gray Market Profiteering). The manufacturers don't receive these higher prices, so there is no clear profit signal to encourage potential manufacturing entrants. I speculate that this problem persists because budget-strapped states lack the resources to routinely vet all of the entities with a wholesale license.
