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How to Fix the National Drug Shortage

The Times reported last month that drug shortages in the United States are approaching record levels, with thousands of patients facing delays in getting cancer treatments, a drug that reverses lead poisoning, a sterile fluid needed to stop the heart for bypass surgery and antibiotics for strep throat, among many other medicines. One doctor described the shortages as a national health emergency.

In a healthy free market, such shortages would be few and fleeting if they occurred at all. The profit motive would induce existing suppliers to ramp up production and new ones to enter. Instead, the Food and Drug Administration lists 137 drugs that are “currently in shortage.” That shows that the market for medicine needs some kind of medicine itself.

What exactly is going wrong? A key part of the problem is low prices — specifically, low prices paid to manufacturers of many generic drugs and biosimilars. Their profit margins are so thin that it doesn’t make sense for them to invest in production. Some are shutting down. We’re so accustomed to the problem of high drug prices that it’s hard to imagine that low prices are causing trouble, but they are. According to the Times story, Anthony Sardella, a business research adviser at Washington University in St. Louis, told a House hearing last month that generic drug prices had fallen by about 50 percent since 2016. “But there is a high cost to low prices,” Sardella said.

“If I offered you the chance to produce a drug and guaranteed you would lose money on every pill you made, it is unlikely you would go into that business,” Dr. Robert Califf, the commissioner of the Food and Drug Administration, said at a congressional hearing last month. And if you’re already in the business, he said, “you might also skimp on your quality systems and manufacturing.”

Califf added, “So we have got to fix the core economics if we are going to get the situation fixed.” Other solutions, such as better data sharing, he said, are just plugging holes.

So, why are manufacturers of generic drugs fetching such low prices for many of their products? It’s largely because they are being squeezed by powerful wholesalers and buyer representatives. I want to focus on group purchasing organizations, which negotiate prices of drugs and other medical supplies on behalf of hospitals and nursing homes, curating the list of products from which the customers order.

Group purchasing organizations aren’t as well known as pharmacy benefit managers, but they’re similar in many respects. Both types of organizations negotiate drug prices on behalf of their customers. In both, a handful of big players dominate. Both have drawn the attention of investigators in Congress and antitrust authorities.

Their customers are different, though. Pharmacy benefit managers work on behalf of insurance companies and other payers to decide which drugs they will cover and how much they will pay for them. They mainly cover brand-name drugs sold in pharmacies. Group purchasing organizations, in contrast, represent hospitals, nursing homes and other institutions and negotiate discounts primarily for generic drugs and biosimilars, along with medical supplies such as saline solution, needles, bandages and CT scanners. Three companies — Vizient, Premier and HealthTrust — have the bulk of the business.

If a drug manufacturer wants to supply a hospital, nursing home or other institution, it has almost no choice but to go through one of these organizations. The manufacturers pay fees to the group purchasing organization for access to its customers. The fees paid by manufacturers might ordinarily be considered illegal kickbacks under the federal anti-kickback law. But in the 1990s the Department of Health and Human Services concluded that a complete ban on payments could inhibit some potentially beneficial arrangements, so it granted immunity from prosecution to group purchasing organizations as long as they comply with a long list of anti-corruption rules. That safe harbor sticks in the craw of the group purchasing organizations’ critics. “It’s the biggest scam in America, in my opinion,” Phillip Zweig, the executive director and co-founder of Physicians Against Drug Shortages, told me. (Zweig and I wrote for BusinessWeek magazine at the same time in the 1990s.) Sara Sirota of the American Economic Liberties Project, which has joined Zweig’s organization and others in asking the F.D.A. and the Federal Trade Commission to investigate, told me the fee payments unavoidably create a conflict of interest and “should be rolled back.”

Critics say the organizations wield their market power to demand low prices and high fees, shrinking the manufacturers’ profit margins to the point where it’s barely worth the effort. Earlier this year, Akorn Pharmaceuticals, which was the sole active domestic supplier of a special dose of liquid albuterol used by hospitals for asthma patients, shut down production and dissolved in bankruptcy court.

The tough bargains driven by group purchasing organizations are one big reason that a lot of manufacturing of generic drugs that remained in the United States has moved offshore, particularly to India, which has lower production costs, the critics say. Some of India’s manufacturers are excellent but others are sloppy and corrupt, and regulators have done little to clean them up or shut them down. In April, a Bloomberg analysis of India’s pharma industry found that in the preceding six months, “its generic cough syrups have killed dozens of children, its eye drops have caused blindness and its chemotherapy drugs have been contaminated.”

I asked Todd Ebert, the president of the Healthcare Supply Chain Association, the trade group for the group purchasing organizations, for his response to the critics. On the topic of the fees collected from manufacturers by his members, he said studies have shown they “don’t affect the price of products.” He said they average around 2 percent of the prices of products. He said, “When we sit down with our customers, they do not complain about the safe harbor” from prosecution over the fees.

On the topic of shortages, Ebert said they are usually caused by manufacturing and quality control issues. He said the group purchasing organizations are determined to avoid shortages: “You can have the best price in the world but if you can’t get product, no one benefits.” The organizations also make sure the drugs their customers buy are safe, he said. Subodha Kumar, an expert on group purchasing organizations who teaches statistics, operations and data science at Temple University’s Fox School of Business, told me that drug shortages may be an occasional, unintended side effect of the way the organizations work to hold down prices for their customers, the hospitals and nursing homes. The organizations force manufacturers to give them exclusivity or at least priority of supply. That makes it hard for manufacturers to help out other buyers that suddenly find themselves short. Group purchasing organizations also give their customers — the health care institutions — financial inducements to do business only with them, which can be a problem if the organization’s source runs short.

“Regulators need to sit down and decide how to keep the good part of the G.P.O.s and take out the bad part, or at least put in checks and balances,” Kumar said.

The good part is that group purchasing organizations really do save money for hospitals and nursing homes, while assuring them (most of the time) of a reliable supply, Antonio Ciaccia, who is the president of 3 Axis Advisors, a consulting firm, told me this week. The bad part, he said, is that “when somebody is granted power to serve as a gatekeeper, there’s a lot of opportunities to leverage that power in ways that do not benefit the consumer.”

I’ll wrap up with a quote from Representative Morgan Griffith, a Virginia Republican, who spoke last month at a hearing by the Oversight and Investigations Subcommittee he chairs. It’s part of the House Committee on Energy and Commerce. “We have an economic environment so unappealing to manufacturers that lifesaving drugs are produced by one, or at most two, companies worldwide, often at an unsustainable, artificially low price,” he said. That needs to change.

Reporter: Peter Coy for the New York Times



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