According to a report issued June 15th by the Committee on Oversight and Government Reform of the House of Representatives, the widespread shortages of generic injectable medications are due to two main factors. The first is growing market concentration over the past decade, which was accelerated by a provision in the Medicare Modernization Act (MMA). The second is increased FDA enforcement and regulation, which has shut down a substantial amount of manufacturing capacity.
American patients and doctors currently confront an unprecedented shortage of critical drugs. The widespread shortages are causing inferior treatment regimens, interruptions in care, higher health care costs, and even premature death. The drugs in shortage are mostly generic injectable medications, many of which have been on the market for decades. Although the shortages have been attributed to a myriad of factors from a lack of raw materials to increased demand, information obtained by the Committee on Oversight and Government Reform shows that the crisis was largely sparked by actions of the Food and Drug Administration (FDA). The Committee has learned that FDA regulatory activity has effectively shut down 30% of the total manufacturing capacity at four of America’s largest producers of generic injectable medications: Bedford Laboratories, Hospira Pharmaceuticals, Sandoz Pharmaceuticals, and Teva Pharmaceuticals. Of the 219 drugs listed on the American Society of Health System Pharmacists (ASHSP) shortage list as of February 21, 2012, at least 128 – 58% of the drugs on the shortage list – were produced by at least one facility undergoing FDA remediation.
The drug shortage crisis that took off in 2010 began shortly after Margaret Hamburg became FDA Commissioner.
Between 2009, when Margaret Hamburg became FDA Commissioner, and 2010, the number of warning letters sent by the agency increased 42%. Between 2010 and 2011, the number of warning letters sent by the FDA increased an additional 156%. In many cases, warning letters have resulted in companies agreeing to take manufacturing off-line to address FDA criticisms.
Since this time, the FDA has failed to ensure that enforcement and compliance activities are conducted in a manner that does not create unnecessary shortages of critical drugs the report states. In response to FDA prodding, companies producing generic injectable drugs have taken their manufacturing off-line simultaneous to other generic competitors also going off-line. These simultaneous shutdowns diminish the ability of competitors to alleviate the shortages with increased production. Last year, a report from the Assistant Secretary for Planning and Evaluation at HHS acknowledged the risk from shutting down manufacturing lines:
This temporary closure of a large manufacturing facility can also lead to other facilities being unable to meet the increased demand for the drug due to the lack of excess capacity and the pressure of ramping up supply for multiple drugs in other facilities.
Among shuttered manufacturing lines that occurred over the previous two years, the committee’s review did not find any instances where the shutdown was associated with reports of drugs harming customers.
When problems that do not pose an immediate threat to public safety are detected, directing facilities to make targeted improvements under close supervision of the FDA can be a more appropriate response than actions that lead companies to shut down manufacturing lines. While such a response may place inconvenient burdens on the FDA’s bureaucracy, greater use of such a targeted approach would have significantly diminished the public health crisis the country is facing from the abundant number of drug shortages. It is noteworthy, however, that the overall damage inflicted by the FDA’s decisions to shutter manufacturing lines may extend well beyond the current drug shortage crisis. The shortages of generic injectable drugs are only the most visible result thus far of the FDA’s stepped up enforcement activities.
While FDA actions over the past several years are the primary reason for the severity of the drug shortage crisis, the Committee also found that growing market concentration over the past decade laid the groundwork for the crisis. One contributing factor to the growing market concentration is a provision of the Medicare Modernization Act (MMA) which dramatically reduced the prices paid by Medicare for many generic injectable medications, particularly older generics. Manufacturers are reluctant to raise prices above what Medicare reimburses providers who administer them. As a result, the Committee has learned that manufacturers are losing money producing generic injectable oncology drugs. When manufacturers lose money on a product, they are incentivized to switch production away from that product. Therefore, it is not surprising that many of the drugs on the shortage list are generic oncology drugs. A recent economics research paper found that drugs more affected by the MMA are much more likely to be in short supply than drugs less affected by the MMA.
Group purchasing organizations (GPOs) have also contributed to a market structure that makes shortages more likely. GPOs, which emerged as a mechanism for providers to increase their buying power, assemble large networks of hospitals and clinics who agree to purchase drugs through a GPO. GPO contracts, which are structured to take advantage of large economies of scale in drug production, result in only a few large manufacturers producing each generic injectable medication. Because of intense manufacturer competition to win GPO contracts, prices are driven down – the intended goal. As a consequence, however, companies that cannot produce a drug at large enough output levels to take advantage of the economies of scale – often because they lack the guaranteed source of demand that GPOs provide – will stop producing the drug or will neglect to enter the market.
Largely because of GPO contracting and the MMA’s impact on changing Medicare’s reimbursement formula for injectable medications, individual generic injectable drugs are being produced by at most three companies. In 2010, 90% of generic injectable oncology drugs were produced by three or fewer manufacturers. In such a tight oligopoly, the temporary closure of a significant number of the production lines in one or two manufacturers’ facilities makes shortages much more likely.
Although the drug shortage crisis is likely to continue until manufacturers bring their facilities back on line, policymakers can take action to guard against future crises. Most importantly, a common sense regulatory approach must be restored at the FDA. Agency protocols should be revised so that the agency is required to consider the implications of its actions on the nation’s supply of critical drugs. In addition, the drug shortage crisis has shed greater transparency on the dysfunctional price system that governs generic injectable medications. To improve the price mechanism, Congress should reform the way that Medicare pays for drugs so the program’s reimbursements better reflect actual supply and demand conditions in the market. In the meantime, proposals to allow drug companies to share information about each other’s manufacturing capability and product availability may have merit because of the extraordinary circumstances of the present crisis. However, this type of information sharing potentially places consumers at risk of collusion by the large manufacturers.