A Double Edged Sword for U.S. Healthcare

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The U.S. is in the midst of a quiet drug crisis - an unprecedented shortage of critical generic medicines affecting everyone from cancer patients to patients waiting for routine surgeries. The shortage has everyone from regulators to companies scrambling to find solutions, while industry critics are calling for the FDA to mandate that companies keep making some medicines, even when they lose money on them.

Their sense of alarm is understandable, but forcing companies to act against their bottom-line interests will only make things worse. A better solution would focus on improving communications between regulators and stakeholders and strengthening market incentives for companies to keep producing high quality generic drugs.

Ironically, the shortage is the result of America's highly competitive, highly efficient system for rewarding both drug innovation and generic competition. In the long run, the system works well: Americans benefit from having a thriving, innovative biopharmaceutical industry and widespread access to inexpensive, high-quality generics.

As patents expire and generic competitors enter the market, once expensive, brand-name drugs plummet in price, to the great benefit of patients and payers - generic drugs saved the U.S. $121 billion in drug costs in 2008 alone. Today, according to IMS Health, about 75 percent of all U.S. prescriptions are for generics, up from just 57 percent in 2004 - and companies like Wal-Mart offer 30 day supplies of hundreds of generic drugs for just $4 a month. Meanwhile, companies with drugs losing patent protection also have powerful financial incentives to invest in new research to develop newer and better medicines for patients, and to make up for lost revenue.

In the short run, however, problems can crop up as pricing competition drives generic drug prices to rock-bottom levels, forcing less efficient producers to exit the market.

This may lead to just a few (two or three) companies producing important generic drugs. In this situation, with hospitals or pharmacies reluctant to keep large quantities of drugs in stock they don't immediately need, shortages can crop up quickly when there are sudden spikes in demand.  Also, as price competition intensifies, some companies may decide that profit margins or demand for a given medicine is too thin to justify continuing production.

The "short run" can be a matter of life and death for patients waiting on critical drugs for diseases like lung cancer or leukemia. Today, some cancer drugs are in short supply in some regions of the U.S. - including carboplatin, cisplatin, doxorubicin, etopiside, and leucovorin. In many cases, physicians or pharmacists can substitute other drugs, but for some cancers "there are no equivalents, no work arounds," says ASCO president-elect Michael Link.

Whatever the cause of the shortages, they appear to be growing worse over time.  A particular problem appears to be occurring with complex drugs known as sterile injectables, which the FDA says have experienced "severe and frequent shortages in recent years," accounting for 46% of total drug shortages in 2009.

Sterile injectables require a relatively complex manufacturing process with a substantial "lead time" compared to other drugs.  This limits the number of companies that have the capacity to make them.

One example is the fast-acting anesthetic propofol, first approved by the FDA in 1989, and which lost patent protection in 1998. By 2009, just three companies were making generic propofol for the U.S. market: Teva Pharmaceuticals, APP Pharmaceuticals, and Hospira. Last October, both Hospira and Teva had to recall propofol due to FDA-identified contamination in their product lines. By May 2010, Hospira was still off-line and had to recall all of its customers' inventory, according to the FDA.

In the meantime, Teva announced that it would not be returning to the market, a decision perhaps motivated by a massive ($500 million) punitive-damage award against the company as a result of patients contracting Hepatitis from contaminated propofol vials. Explaining the decision, Teva said that it made "little or no profit from the drug," which is complex to manufacture. That left APP Pharmaceuticals as the last firm manufacturing propofol, and they haven't been able to keep up with demand.

Critics have long blasted the pharmaceutical industry for focusing too much on "profits", and called for empowering the FDA to force companies to continue making generic drugs, even when they are unprofitable. This move would of course be a disaster, and it would potentially reduce the incentives for companies to make complex generic drugs on the assumption that exiting the market would be costly. It would also give payers even more power to slash prices, knowing that companies could never refuse to produce the drug, even if they had to sell it at a loss.

A better approach is for regulators, manufacturers, and health systems to work harder to identify potential shortages as early as possible, allowing hospitals and pharmacists to develop plans to better manage or reallocate existing drug supplies before the shortages occur. Hospitals and health systems might also want to consider long-term purchase agreements or paying a few pennies extra per pill to reward suppliers with a track record of making complex, high-quality generic products. Rewarding quality and long-term reliability with a slightly higher price (or longer term contracts) should give producers better incentives to stay with generic product lines and invest in continuously improving their manufacturing processes.

More can certainly be done as well on the FDA side, including better monitoring to ensure that companies are in compliance with current Good Manufacturing Processes, along with upgrading the FDA's ability to provide meaningful oversight inspections. This would include increased funding for more frequent FDA inspections of high-risk manufacturing facilities, and adequate staffing to conduct inspections outside the U.S.

Should the FDA do more? "More is always better," said former FDA Associate Commissioner Peter J. Pitts. "But the agency must spend its money where it can get the biggest bang for the regulatory buck. More focus should be put on those who present the highest risk -- particularly overseas. A handful of FDA inspectors in China and India just doesn't cut it."

The problem of drug shortages comes at a time when the drug market is changing significantly. In the next several years, the market between generic and branded drugs will blur as innovative companies expand into the generics and biosimilars markets.

While no company is immune from manufacturing problems (and many generic firms produce high-quality products), the greater manufacturing experience and scientific expertise available to large, established pharmaceutical companies may help to smooth out at least some of the reliability issues with complex drugs like sterile injectables. And competition works both ways in the pharmaceutical industry. As more traditional drug companies are moving into generic markets, generic drug companies in places like India are trying to move upstream and develop a drug-discovery capacity of their own - believing that they can produce new drugs better and less expensively than U.S. and European companies.

In the long run, supply and quality problems are likely to smooth out as the industry restructures to meet new market and competitive realities. But that's cold comfort for patients facing drug shortages today.

The challenge for health systems, industry, and regulators right now is to find a way to overcome existing supply challenges without dampening incentives to innovate, even for older generic products. Creating better market incentives, improving communications between stakeholders, and bolstering the FDA's ability to conduct risk-based inspections are the best ways to prevent the next shortage before it happens.


Paul Howard is a Manhattan Institute senior fellow and director of the Manhattan Institute's Center for Medical Progress

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