Ending Drug Shortages by Fixing Reimbursement

When drug shortages were in the news last fall, I (among others) cited the perverse economic incentives from Average Sales Price (ASP) as a key factor behind our very fragile generic injectable supply chain. See What’s Behind the Drug Shortage Epidemic.

To my surprise, politicians have heard the message. Senator Orrin Hatch (R-UT) is now drafting the “Patient Access to Drugs in Shortage Act,” which will change reimbursement for generic injectables from ASP + 6% to Wholesale Acquisition Cost (WAC) for injectable generics with 4 or less manufacturers. See Senator Hatch Releases Discussion Draft on Drug Shortages Legislation.

Meanwhile, a new working paper from a Stanford business school professor provides some intriguing empirical evidence that the introduction of ASP is a factor behind drug shortages.

Read on for the details. Let’s hope this important legislation makes progress in the current Congressional climate. I know patients would be glad if it becomes law.

SENATOR HATCH’S PROPOSAL

The Community Oncology Alliance (COA) recently posted the following documents about Senator Hatch's legislation:

• Summary of Patient Access to Drugs in Shortage Act (nice and pithy)
• Legislative draft of Patient Access to Drugs in Shortage Act (for hardcore legal fans only)

Three items in the draft legislation relate directly to the broken incentive system:

• Price Stability—The Medicare reimbursement rate for generic injectable products with 4 or fewer active manufacturers would increase from ASP + 6% to WAC.
• Medicaid/340B Rebate Exemption—Generic injectable products with 4 or fewer active manufacturers would be exempt from Medicaid rebates and 340B discounts.
• Extended Exclusivity—Manufacturers who hold an approved application for a drug that would mitigate a shortage can extend by 5 years any period of exclusivity.

These fixes start to address the fact that the reduced return on investment from generic injectable manufacturing has created the enabling conditions for drug shortages.

THE ROOTS OF SHORTAGES

Unlike more traditional oral solid generic drugs, injectables require highly-specialized manufacturing capacity that, in the short-run, can’t be quickly increased or repurposed. For mature generic injectable drugs, low reimbursement and weak market signals reduces the incentive for a manufacturer to enter the market.

As a result, the supply chain has become very fragile for many generic injectable drugs. IMS Health found that four out of ten products with shortages have one or no suppliers. See Drug Shortages and Our Fragile Supply Chain.

Paul Howard of the Manhattan Institute summarized the motivation for this legislation in Market better than FDA to address drug shortages:

“[U]nless we improve incentives for makers of critical generic medicines to stay in the market and invest in manufacturing upgrades, drug shortages may become an endemic feature of the marketplace.”

Last November, I did a podcast interview with Paul that discusses Medicare Part B, pricing dynamics, and drug shortages. I suggested that, instead of ASP, more market-oriented pricing would improve manufacturing incentives for generic injectables. Listen here:

Hmmm, I wonder why my kids tell me that my face is perfect for podcasts...

PROFESSOR YURUKOGLU’S RESEARCH

On a related note, I want to highlight an intriguing new academic working paper: Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals by Ali Yurukoglu, an Assistant Professor at Stanford’s business school.

Using a sample of drugs from 2001 to 2009, Professor Yurukoglu’s statistical analysis finds a positive relationship between:

• the fraction of a drug’s revenue comes from Medicare Part B (a proxy for the degree to which ASP matters), and
• the likelihood that a drug had a shortage in the post-2005, ASP era.

This is a working paper, not a peer-reviewed, published journal article. Although many readers may find the paper to be slow going, I believe Professor Yurukoglu's paper to be the first academic attempt to formally link economic incentives and drug shortages. It’s a nice start.