Drug Bust

A couple weeks ago I noted that a major summer story was the growing shortage of lower-margin, off-patent but still medically important drugs, particularly several that are the mainstays of cancer chemotherapy (my post of 9/8/11, “Market Failure in the US”).  And it was reported this week that the shortage of the latter is not only affecting patient treatment (bad enough) but also delaying the conduct of about 300 studies of new treatments supported by the NCI (FierceBiotech article).  I’m following this story to learn if the solutions for the US market failure may guide creating markets in the many countries that lack  affordable drugs.

I found a helpful report on the US shortages, which apparently have tripled in number since 2006, and policy recommendations in a recent publication by the Food and Drug Law Institute (Hill and Reilly 2011).  The report is based on a summit held in November 2010 involving all the major players:  various professional organizations like the American Society of Health-System Pharmacists, the Institute for Safe Medication Practices, drug manufacturers, distributors, group purchasing organizations, and the FDA.  According to the report, the penultimate cause of most shortages is a technical problem the manufacturing process that is compounded by there being a few manufacturers, and in some cases, only one, available to increase production of the needed drug.  However, I also noted that, according to a recent summary of drugs that are in short supply (FiercePharma Manufacturing article), while about 20% have a sole source, most have three and up to eight manufacturers.  How is it that the alternative suppliers are unable to pick up the slack?  The Food and Drug Law Institute report sheds no light; it has six policy recommendations for Congress and the FDA, but no mention of what technical or informational deficiencies prevent manufacturers from taking advantage of shortages and increase market share.

While I have no idea what technical backups may be needed to solve the manufacturing process snafus, I can imagine a couple quick procedural fixes.  For example, the FDA could require a manufacturers maintain an inventory of a drug deemed essential of sufficient size to meet all or some major fraction of its contracts or that it have contingency agreements to purchase the drug or needed intermediates it lacks at a fixed price and be allowed to pass some but not all of its increased cost through its contractors.  An article in the New York Times (NYTimes article) reported that the government may stockpile certain cancer drugs (sounds like a bureaucratic nightmare) and that the FDA will increase inspections of overseas manufacturing plants to decrease the likelihood of shutdowns, an effort to be funded through a fee on companies.  As an amateur economist (I’ve read Grady and Yoram’s Cartoon Introduction to Economics Vol. One:  Microeconomics), I wondered if lack of information on demand, supply, and prices was limiting the ability (and interest) in companies to create a market for fulfilling all those contracts that are being met.

Fortunately, the folks at the Kaiser Family Foundation also wondered about the factors that in the US drug marketplace that may be preventing it from functioning well and delivering sufficient supplies of affordable drugs.  The result was a report in 2005 by the Health Strategies Consultancy (Follow the Pill) from which I learned that there are a large number of players, money flows, and deals, most of which are not well-defined or transparent.  Here’s my abridged version of a pretty complicated situation.  The major players are manufacturers (about 10 supply 50% of all prescribed drugs), wholesale distributors (in 2004 there were only three that had 88% of the market), pharmacies (tens of thousands of small ones, a few big chains, but many institutional, specialty, and mail-order pharmacies), pharmacy benefit managers (intermediaries between the payers [insurance companies] and the consumers who process about 60% of all prescriptions), health plan providers (insurers), employers (who contract with the insurers), the government (a major purchaser through Medicaid and the Department of Veterans Affairs), and, of course, the docs who start the ball rolling by prescribing drugs for the consumer.  The product flow is fairly straight forward:  the manufacturers send drugs to the wholesalers who distribute to the pharmacies who hand it to you and me.  The very complicated and obscure part is the money flow and the deals that are made in multiple directions that ultimately determine the prices that add up to the $300 billion in US prescription drug annual sales.  The authors summarize:  “The manufacturer typically interacts with three primary entities when dealing with price: wholesale distributors, retail pharmacies, and pharmacy benefit managers.  Pharmaceutical manufacturers negotiate separate contracts with these entities and offer various discounts [some percentage off a fictional price] and rebates based largely on the entities’ varying ability to influence the quantity of drugs that are sold [i.e., payments from the manufacturer to the intermediary when sales targets are met].”  The result:  “This complexity can result in substantial variations in what different purchasers pay for the same drugs.”  And, I would add, a factor in causing drug shortages.

What’s this got to do with global health?  Armed with my rudimentary knowledge of the complications (and likely added costs) of the US market, I may be able to understand what is happening globally and what is being done/needs to be done/could be done to get drugs to those currently under-served markets.

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