Reaching the wrong conclusion only makes a problem worse. Witness drug shortages and a bill pending in Congress that would require drug manufacturers to notify federal officials of a disruption to a drug supply six months in advance.
In theory, such a requirement would give the FDA an opportunity to prevent the shortage, notify health-care providers and develop a contingency plan. In reality, that’s not the problem.
“What we’re trying to find out is whether there’s a pattern behind the shortages that we can address,” comment senator Richard Durbin (D, IL). “We’ve got to get down to what is really behind it and try to solve it.”
While earlier and more robust communications between drug manufacturers (largely generic manufacturers of hospital injectables) and the FDA is important – lack of such interaction isn’t the major cause of the problem. The issue at hand is that that, because of the way hospitals purchase medicines, there is no incentive for drug makers to update manufacturing facilities or build new ones. Hence, when a facility goes off-line due to quality concerns (the major cause of supply line disruption) or is retooled for a different (and more profitable) use – shortages can occur. In such an instance, should a manufacturer advise the FDA of potential shortages? Certainly.
But that’s not the real problem. The unreported problem is the role of Group Purchasing Organizations (GPOs). GPOs control the purchasing of more than $200 billion in drugs, devices, and healthcare supplies annually for some 5,000 private, acute care hospitals nationwide. And they keep costs low. That’s the good news. The bad news is that they are also permitted (by law) to charge a fee to hospital suppliers based on percentage of sales volume for a particular product. And sometimes it’s a hefty one – often as high as 35-50%. That certainly throws a spanner in the supply-and-demand proposition. Six months supply at ever-lower margins becomes a non-starter for many companies – further exacerbating the problem rather than solving it.
GPOs are a monopsony (a buyer’s monopoly) dominated by six firms that control about 90% of the goods purchased by hospitals via GPOs. The power of these organizations is such that they can often dictate which drugs, devices and supplies are used in hospitals – and which companies are allowed to sell them.
These practices have created a concentrated market that excludes other existing and would-be suppliers and distributors. So, with no other suppliers able or available to fill the gap, increases in demand for generic drugs have resulted in shortages and surging prices. It is no coincidence that the problem is generally limited to generics sold to healthcare facilities through GPO contracts rather than directly to consumers through retail pharmacies.
GPOs have their critics. Among them is former Wall Street Journal reporter Phil Zweig who writes that, “GPOs have concentrated production of generic drugs in a handful of drug makers and have forced some manufacturers to cease production of various lifesaving drugs altogether and distributors to slash inventories to the bone. In a nutshell, these cartels have undermined the laws of supply and demand in this critical industry.”