Congress Seems Intent on Making Drug Shortages Worse

by Greg Conko on February 15, 2012 · 1 comment

in Features, Health and Illness, Healthcare, Regulation

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Now that the problem of prescription drug shortages has begun to affect children, members of Congress want to be seen as doing something – anything, really – to avert the crisis. A bi-partisan group of House members led by Rep. John Carney (D-Del.) introduced a bill two weeks ago. And yesterday, Sens. Amy Klobuchar (D-Minn.) and Robert Casey (D-Penn.) moved to attach their drug shortage bill to a piece of transportation legislation moving through the Senate. Unfortunately, most of the proposed action will have little to no affect on the fundamental underlying problems associated with drug shortages. Worse still, by ignoring the real problems and trying to put a defective bandage on the symptoms, the bills very well may make the shortages worse.

First, some background. There are currently around 250 prescription medicines — most of them generic versions of cancer drugs and surgical anesthetics — that are considered to be in “short supply”, according to the American Society of Health System Pharmacists. That’s up sharply from well below 100 drug shortages in a typical year — rising from just 58 in 2004 to 149 in 2008 to 211 in 2010. And, though there are alternatives for many of these drugs, several have no good alternatives for certain conditions. As USA Today’s Liz Szabo discusses, a shortage in the cancer drug methotrexate is particularly troublesome for children with acute lymphocytic or lymphoblastic leukemia (ALL). There are alternatives to methotrexate for other cancers, but not for ALL.

So, why the recent spate of shortages? In some cases, it’s due to a shortage in raw materials. And, for drugs like Ritalin and other ADHD treatments, heavy-handed DEA regulations have made it difficult to increase production of the raw materials. But only a relatively small portion of the shortages can be attributed to a shortage in raw materials. Still other regulations have significantly contributed to the shortages in many other products.

John Goodman summarized some of these other issues nicely in a post last summer. One contributing factor is the FDA’s increasingly strict regulation of drug manufacturing facilities, which Goodman calls a “zero tolerance regime” that is “forcing manufacturers to abide by rules that are rigid, inflexible and unforgiving.” FDA has been more aggressive in shutting down production facilities when even small quality control problems arise. A decade or two ago, a paperwork problem or some inappropriate handling procedure that didn’t directly affect drug safety or quality might have been addressed with a slap on the wrist. But over the last several years (and not just since the beginning of the Obama administration) FDA has, more and more, addressed these problems by temporarily shutting down plants until the problems could be resolved.

This problem is exacerbated by the fact that FDA not only must approve drugs as safe and effective, they also must approve the quantities produced and the timing of production schedules. So, when one manufacturer’s plant is closed, competitors need to get FDA approval before they can ramp up their production to meet the shortfall. Waiting for FDA to get through the approvals takes time, and that contributes to some of the drug shortages we’ve seen. Most of the legislation being proposed would instruct FDA to expedite these reviews (both to bring shuttered facilities back on-line more quickly and to let competitors increase production). To some extent, that very well may help. But there’s nothing stopping FDA now from expediting the reviews, and nothing in the legislation would force the agency to change. Essentially, those features are “feel good” measures intended to make Americans think their congressional representatives are “doing something.”

Still, that’s not the root of the problem. As former Obama administration health policy advisor Ezekiel Emanuel explains in this New York Times op-ed, the bigger factor in drug shortages is government price controls, combined with the fact that profit margins for the generic drugs that comprise the vast majority of drugs in short supply are so small that there often are just two or three manufacturers (and occasionally just one) for a particular critical drug.

Under the terms of the Medicare Prescription Drug Improvement and Modernization Act of 2003, manufacturers may only charge a fixed “average sales price”, plus 6 percent for drugs that are reimbursed by Medicare. But, for a variety of reasons, the officially calculated average sales price is generally thought to be much lower than the actual average price. Not everyone agrees that the formula is systematically biased downward, but the HHS Office of Inspector General concluded in a 2006 report that the Department was calculating the average sales price incorrectly, with many prices too high and others too low. Worse still, the statute prevents the prices of drugs reimbursed by Medicare from rising more than 6 percent every six months.

When shortages arise in a typical market, we would expect prices to rise, with that serving as an incentive for manufacturers to increase production. But, as Emanuel explains, “[b]ecause the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.”

The proposed legislation would do nothing to address this price control problem. And, to some degree, the legislation would actually exacerbate it. Both the Carney and Klobuchar bills contain so-called “anti-stockpiling” and “anti-price gouging” elements intended to stabilize prices. But it’s Economics 101 that, when the supply of something falls below demand, the price will rise. What every politician who complains about price gouging forgets, ignores, or just doesn’t realize, is that rising prices are a signal (a) for consumers to conserve the supply of a scarce product, and (b) for manufacturers to produce more of it. That’s exactly what stockpiling is, an effort to conserve a drug that’s in short supply.

When prices of these drugs rise, doctors and hospitals start asking themselves, “Do we really need to use this drug in this situation, or is there a reasonable substitute?” That in turn means that the patients who most need the drugs are more likely to get them, and that patients who could make do with a lower dose or an alternative use less of the product that is scarce. No consumer likes sharply rising prices, which is why politicians always propose these kinds of measures. But the problem with preventing so-called price gouging is that it means no signal gets sent to consumers indicating that conservation is necessary, and no signal gets sent to manufacturers that it’s worth ramping up production. In short, anti-stockpiling and anti-price gouging policies almost inevitably make a shortage worse, not better.

In short, drug shortages are a real problem. But the way to alleviate them is not to eliminate the market signals that incentivize adequate production. In the end, we would be better off if Congress did nothing at all than if they enacted these bills. Better still, though, would be for Congress to lift the stupid and poorly thought out rules that have contributed to the shortages in the first place.

Fred Young February 16, 2012 at 4:50 pm

Why the hell does FDA have authority over production schedules!?!?!?

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