Drug Shortage Fixes Migrating Toward Economics

After spending time on ideas for early warnings, Congress now is also considering whether economic incentives could prevent shortages.

Efforts to address economic issues related to drug shortages appear to be gaining steam on Capitol Hill, with one senator contemplating legislation and House and Senate committees planning additional hearings.

While a lot of attention has been paid to the drug shortage issue for several months, the focus appears to have shifted slightly to issues that are not directly related to regulatory policy.

After probing FDA and its policies for a solution, legislators now are considering whether reimbursement policy or other economic incentives could be used to prevent shortages.

Marcie Bough, senior director of government affairs for the American Pharmacists Association, said policymakers are looking at how industry production decisions and profitability are tied to the issue.

In some cases, prices and profit margins are so low that manufacturers end production rather than address Good Manufacturing Practice violations, according to a recent FDA report exploring the agency’s approaches to shortages.

“We are learning more and more trying to identify why there’s a shortage,” Bough said. “The economics is coming into play.”

The House Oversight and Government Reform Committee Subcommittee on Health Care, the District of Columbia, Census and the National Archives announced a hearing on the shortage issue was scheduled for Nov. 30. The hearing will focus on the causes of shortages, “with a particular emphasis on the impact of government price controls,” according to the notice. A witness list has not been released.

The Senate Health, Education, Labor and Pensions Committee also is planning a drug shortages hearing Dec. 15, but details have not been released.

That hearing could include a discussion of drug shortage legislation being crafted by Sen. Orrin Hatch, R-Utah, to address the reimbursement issue.

Hatch’s concept would use economic levers, such as reimbursement rates, in addition to an early warning system to help prevent shortages, according to sources familiar with the effort to develop the legislation.

Ideas also under discussion include providing manufacturers of drugs in short supply with exemptions from Medicaid rebates and the 340B discount purchasing program for community health centers.

Tighter Contracting Could Boost Supply

The bill appears to be an attempt to remedy issues related to the elasticity of supply and demand for sterile injectable drugs, which are most commonly affected by shortages.

Prices for the largely generic drugs leave little profit margin in a crowded marketplace. The Health and Human Services Office of Assistant Secretary for Planning and Evaluation also found that supply and demand do not respond much to short-term changes in price.

Rather than seeing a price increase when a disruption occurs, the drug instead goes into shortage.

Purchasers also have somewhat weak penalties in their contracts with drug suppliers that do not incentivize them to store extra product or take steps to prevent a shortage.

In addition, it is difficult for manufacturers to begin manufacturing a drug, if it is in shortage, because special equipment and FDA approval is required, which can be expensive and time-consuming to obtain.

The ASPE report on economic causes of drug shortages, also issued Oct. 31 along with FDA’s analysis, indicated there is no real financial return for investing in excess capacity in case there is a shortage, because it would only earn revenue in a shortage situation, which is not a common occurrence.

The limited ability to compel supply, such as when a manufacturer cannot deliver on a contract because of an active pharmaceutical ingredient supply disruption, and low price elasticity create a seemingly perfect storm.

“Manufacturers face an asymmetry of incentives,” ASPE wrote in the report. “There is little cost (except reputational) of producing too little of one drug (rather than another), but a potentially high cost of producing too much of that drug.”

If Hatch’s legislation addresses that issue, it may be embraced by industry and others as a way of incentivizing more capacity-building.

However, officials from several generic firms already have told FDA officials and other stakeholders they are growing their manufacturing capabilities, but it will take several years to come online (Also see "Drug Shortages: Can The Blame Game Help Find Solutions?" - Pink Sheet, 3 Oct, 2011.).

FDA’s shortages report said upgrading aging facilities and expanding capacity, as well as creating overlapping systems can increase shortage prevention without a resource-intensive notification effort by the agency.

ASPE said the agency also could approve new manufacturing lines faster, which the agency has acknowledged it already attempts.

FDA maintains its inspection policies neither cause nor prevent drug shortages, but that hasn’t stopped some from placing some blame on the agency (Also see "To Prevent Drug Shortages, Don't Look To Inspections, FDA Says" - Pink Sheet, 22 Aug, 2011.).

ASPE also recommended insurers and other private drug purchasers toughen their contracts’ failure-to-supply requirements in exchange for increases in price. The language could induce manufacturers to build more production and API capacity, according to the report.

Early Warning Was The First Step

FDA also wants to develop a stakeholder reporting network to help increase reports pertaining to shortages.

Industry appears interested in the idea as well. The Generic Pharmaceutical Association and Pharmaceutical Research and Manufacturers of America, both prominent industry groups, have been pushing their members to ensure they communicate with FDA about potential manufacturing disruptions.

GPhA said it wants to formalize a reporting process to FDA and PhRMA wants to enhance communications between stakeholders in the supply chain.

Most of the congressional attention in recent months has focused on the early warning issue. Reps. Diana DeGette, D-Colo., and Tom Rooney, R-Fla., introduced a bill that would require manufacturers to tell FDA at least six months in advance of a temporary or permanent stoppage.

Sens. Amy Klobuchar, D-Minn., and Robert Casey, D-Pa., have introduced a similar bill. The measures were seen as an indication that the idea showed promise, but FDA said it alone will not solve the problem (Also see "Rx Shortages Defy Easy Solutions, FDA Notes As It Offers Congress Some Ideas" - Pink Sheet, 19 Sep, 2011.).

The bills could move as a stand-alone measure and also have been mentioned as potential additions to the Prescription Drug User Fee Act reauthorization scheduled for passage in 2012.

The American Medical Association adopted a policy Nov. 14 calling for makers of vital and life-saving medications and vaccines to be required to write supply continuity plans.

The pending bills include provisions requiring those plans for drugs considered vulnerable to a shortage.

President Obama endorsed the bills when he issued an executive order asking manufacturers to give as much advance warning as possible. FDA also announced at the time that it would more than double the size of its staff dedicated to drug shortages (Also see "Obama's Drug Shortage Efforts Focus On Personnel, Persuasion" - Pink Sheet, 31 Oct, 2011.).

FDA said in its shortages report that it also will explore the possibility of creating a shortage prediction and probability model.

Practitioners have called for FDA to give more information about estimated length and severity of shortages so they can better plan for them (Also see "Drug Shortages: FDA Wants Advanced Warning; Practitioners Want Even More" - Pink Sheet, 26 Sep, 2011.).