Solving the Shortage in Generic Cancer Drugs

According to the FDA, the number of drug shortages has tripled from 61 in 2005, to 178 in 2010. These drugs include chemotherapy drugs (28%), antibiotics (13%), anesthesia, and even crash cart drugs for heart attack patients. As reported by Gatesman and Smith in NEJM, this shortage has increased the cost of healthcare by forcing providers to shift from unavailable generics to more expensive name-brand drugs, often with no increased efficacy, or purchase the generic in the “grey market” of unofficial distributors. Oncologists who use Leucovorin ($32/dose) to combat colon cancer can purchase it at a mark-up of up to a 3000% through the grey market, or opt for the name-brand Levoleucovorin ($1,284/dose). The use of unfamiliar name-brand (on patent) drugs can cause problems aside from the added expense: 35% of clinicians indicated an error had occurred because of drug shortages–e.g. resulting in incorrect administration, or overdose. Assistant Secretary for Health and Human Services Harold Koh warned that these shortages are also “dramatically affecting clinical trials” of cancer regimens, resulting in suspension of trials and patient enrollment.

On October 31, President Obama issued an Executive Order directing FDA to address the growing issue of critical drug shortages. This was the first Executive Order to directly address FDA operations in over 25 years. The Order directs FDA to act in three ways:

1) Use its existing authority under 21 U.S.C. 356c to require drug manufacturers to provide adequate advance notice of manufacturing discontinuances.

2) Expedite regulatory review of new drug suppliers, manufacturing sites, and manufacturing changes.

3) Collaborate with the DOJ in investigating price-gouging behavior by “grey market” stockpilers.

While the Executive Order urges FDA to take action on manufacturing shortages, it does little to address the underlying problems that create drug shortages. Indeed, the Order acknowledges that “the root problems and many of their solutions are outside of the FDA’s control…” Providing notice of manufacturing discontinuation, for example, can help physicians and hospitals prepare in advance, but absent FDA authority to order increased production, it cannot prevent manufacturers from choosing to cease production, nor can it affect manufacturers who choose to reduce rather than discontinue entirely. Expediting regulatory review can make it cheaper and easier for manufacturers to enter the market, but they will face the same problems that caused other manufacturers to exit the market in the first place.

Enforcing price-gouging laws against vendors who charge substantial mark-ups is a sound idea. It will prevent price-gougers from stockpiling needed drugs as soon as word spreads of a manufacturing discontinuance; libertarians who applaud price-gouging generally should recognize in this case that these vendors can only distribute drugs according to ability to pay (since need is roughly equivalent) and lack the benefit of bringing additional goods to market. Still, as with any enforcement of price-gouging laws, this does nothing to solve the underlying shortage.

A key issue is the disconnect between FDA and physicians as to what creates the drug shortage. The FDA attributes 43% of all shortages to quality problems, and 10% to ingredient shortages; only 8% are business decisions. If true, then FDA’s ability to simply instruct other manufacturers to pick up the slack is an effective instrument in combating drug shortages. Even if true, this fails to explain why there is an insufficient number of manufacturers in the first place to make up for supply shortages. Physicians, on the other hand, identify the primary issue as a failure in markets. Gatesman and Smith, for example, suggest that “[c]ontamination and shortages of raw materials probably account for less than 10% of shortages.” This is the same number reported by Emanuel in a recent NYTimes op-ed, who adds that “[m]ost shortages appear instead to be the consequence of corporate decisions to cease production, or interruptions in production caused by money or quality problems, which manufacturers do not appear to be in a rush to fix.”

Perhaps the tripling in drug shortages since 2005 can be attributed to a modification in Medicare payment plans. Before 2003, Medicare would reimburse 95% of the average wholesale price of a generic drug — an unregulated price set by manufacturers — while oncologists could pocket up to a 30% price difference, which they used to support their practices. In 2003, Medicare set reimbursement at the average sales price, plus a 6% markup for physicians, and restricted the price from increasing by more than 6% every 6 months. This was designed to facilitate the competitive drop in prices once a drug becomes generic — up to 90% in in the first 2-3 years. But the 6% mark-up on a drug costing as little as $3.50 a dose was insufficient for oncologists to support their practices (compared to other specialties, oncologists perform fewer associated procedures, so oncology salaries depend on profits from drug sales), so they shifted to prescribing and shifting demand to more name-brand drugs. The change also created an effective price-cap on generic drugs, making it impossible to increase drug prices in response to a shortage. Emanuel writes, “[t]he low profit margins mean that manufacturers face a hard choice: lose money producing a life-saving drug or switch limited production capacity to a more lucrative drug.” An HHS analysis on drug shortages notes “the low price responsiveness of demand for sterile oncology drugs also has implications for inventories and capacity decision.”

One solution is to recalibrate Medicare reimbursements to allow for a higher mark-up after the first three years, and for quicker price increases in response to a shortage. Another might be to adopt what most of Europe, which has no comparable drug shortage, has done: create a higher price floor for generics, and reduce the price of name-brand drugs. Other proposals range from creating private pharmacy plans for generic drugs which would be more responsive to market forces, or to revamp compensation for oncologists–away from selling chemotherapy drugs, to reimbursement for following clinical pathways akin to providing procedures.

Ultimately, the Executive Order merely recognizes a problem but does not fix it. Congress must take quick action to solve the drug shortage crisis beyond requesting FDA to continue doing what it is already empowered to do.