Government Report Concludes Price Controls Cause Drug Shortage

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  • 10/31/2011
 Gardiner Harris' article "Obama Tries to Speed Response to Shortages in Vital Medicines" reports on the administration's latest installment in it's  'go-it-alone' campaign.  This time the administration is seeking to show it is responding to the shorage of cancer drugs and antibiotics that have been steadily growing since 2006.   The executive order will only make the shortage worse because it calls for more aggressive Justice Department investigations of increases in the price of the drugs in short supply on top of administration proposals to impose price controls on all medications:

"The order offers drug manufacturers and wholesalers both a helping hand and a gloved fist in efforts to prevent or resolve shortages that have worsened greatly in recent years, endangering thousands of lives."

(A gloved fist?  Ouch.  I hope that this isn't the President's low cost alternative to PSA screening...)

It instructs the F.D.A. to do three things: broaden reporting of potential shortages of certain prescription drugs; speed reviews of applications to begin or alter production of these drugs; and provide more information to the Justice Department about possible instances of collusion or price gouging.
Price gouging?  Harris may have overlooked some of the findings of the administration's own report on the economics of drug shortages?  Economic Analysis of the Causes of Drug Shortages (HHS)  

Harris summarizes the study: "the administration will release two government reports that mostly blame a dysfunctional marketplace for drug shortages, directly contradicting assertions by some commentators that government rules are to blame."  

In fact the HHS report does more than blame a 'dysfunctional market', it explains what is behind the problem:

"...drugs that subsequently experienced a shortage are those in which the volume of sales was declining in the 2006-2008 period prior to the shortages."

It goes on to note in  AppendixB :   "Analysis of average sales prices shows that shows that oncology sterile injectable drugs that experienced shortages since 2008 decreased in price from $56.17 per unit in Q1 2006 to $37.88 per unit in Q1 2011. Oncology sterile injectable drugs that have not experienced shortages have had relatively stable prices over this period."

In plain English: artificially low prices caused the decline in the drugs that are now in shortage.

Ezekiel Emanuel zeroed in on the cause of the low prices in a NY Times oped back in August:

"The Medicare Prescription Drug, Improvement and Modernization Act of 2003...required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because 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 result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well.)

For some reason Harris extolls the public spiritedness of generic drug companies who will pay about $300 million in one time user fees to break the logjam of approvals at the FDA's Office of Generic Drugs:

"The (generic) industry recently agreed to provide the F.D.A. with nearly $300 million annually to bolster inspections and speed drug applications. That amounts to about 1 percent of the industry’s revenues and about 5 percent of its profits in the United States, an extraordinary vote of confidence in the government’s ability to improve the situation. "

If the point is to show how this agreement will be used to resolve the current shortages, Harris is in error.  The user fee agreement is designed to start accelerating approval of both new and backlogged generic drug applications by 2017.  It has no bearing on the current shortage.  But mentioning it is a nice way to divert our attention from the price controls that have lead to an underproduction of injectible cancer drugs and anti-biotics as well as a reluctance to invest in new facilities or production lines.   As Emanuel notes:

"You don’t have to be a cynical capitalist to see that the long-term solution is to make the production of generic cancer drugs more profitable. Most of Europe, where brand-name drugs are cheaper than in the United States, while generics are slightly more expensive, has no shortage of these cancer drugs. "  (Though it would be interesting to see if that is also a function of treatment patterns in Europe. 

The administration's proposal to launch an attack on 'price gouging' will make companies reluctant to even attempt to raise prices.  At the same time Team Obama is seeking to impose price controls on all Part B injectible drugs and Part D Medicare drugs.   If you like shortages, just wait till these controls kick in. 



Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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