Generic Drug Shortages: U.S. Health Care Systems Accept the Challenge

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In a recent survey of some 1,200 U.S. hospitals conducted by the American Hospital Association, the Federation of American Hospitals, and the American Society of Health-System Pharmacists, more than 90 percent reported having to identify alternative therapies to reduce the impact of generic drug price increases and shortages. The Association for Accessible Medicines, the industry association representing U.S. generic drug manufacturers, reported in its 2017 Access and Savings Report that nine-out-of-ten of every prescription dispensed in America are generic drugs. A generic drug is a medication created to be the same as an existing approved brand-name drug in dosage form, safety, strength, route of administration, quality, and performance characteristics.

Research studies estimate that drug shortages cost hospitals $216 million in labor costs each year, and an additional $200 million annually to substitute drugs in short supply with more costly alternatives. Neither estimate, however, captures patient treatment delays, less effective treatments received by patients, and patient treatments never received. In July 2018, U.S. Food and Drug Administration (FDA) Commissioner Scott Gottlieb established the Inter-Agency Drug Shortages Task Force charged with investigating and identifying the core causes of drug shortages and proposing long-term solutions to Congress. The FDA, however, does not have the statutory authority to order a pharmaceutical manufacturer to manufacture a drug (even if it is medically necessary); require a manufacturer to increase volume of a drug; or change the quantity and to whom the drug is to be distributed.

According to the FDA, over 90 percent of manufacturing-related drug shortages are due to raw material shortages (27 percent), quality manufacturing issues (37 percent), and quality related delays or capacity issues (27 percent). Moreover, the maintenance of a relatively small market and low price for a generic pharmaceutical could be, for example, a result of a lower Medicare Part B reimbursement. In addition, increased complexity, lack of agility in the manufacturing process, and market uncertainty associated with lengthy production lead times could make market entry challenging for many generic competitors. Lastly, generic manufacturing application preparation time, fees associated with the FDA’s Generic Drug User Amendments program, and the wait time for FDA approval to begin manufacturing all involve expenses that could pose a barrier to entry in markets where potential profitability is low.

While the FDA’s Inter-Agency Drug Shortages Task Force is investigating the underlying causes of generic drug shortages, health care systems are innovating through private order initiatives. For instance, in July 2018 the American Society of Health-System Pharmacists published updated national guidelines outlining “best practices” for health care systems to respond to drug shortages. These recommendations include creating an interdisciplinary drug shortage team to make decisions about conserving drug and product supplies; developing a formal process for approving alternative therapies; conducting an operational assessment to evaluate the impact of a new drug shortage; and establishing protocols for communication with patients or family members affected by a shortage.

Further, in January 2019, Premier Inc., a healthcare improvement company, announced that it was establishing a for profit company, ProvideGx, which will develop innovative business models to address generic drug shortages and ensure health systems have continuous and affordable access to shortage medications, as well as those in categories that lack competition. ProvideGx plans to collaborate with quality generic drug manufacturers that can supply pharmaceuticals in short supply; co-fund development of affordable products that address specific market needs; and negotiate and secure contracts for active pharmaceutical ingredients to ensure a continuous supply. In the case of ProvideGx, the use of explicit contracts, and integration of networked activity exploiting health care system buying power, allows this firm to arrange for long-term, secure supply contracts with pharmaceutical manufacturers to help ensure a reduction in shortages of high demand generic pharmaceuticals.

Initially unveiled in January 2018, Civica Rx, previously known as Project Rx, is a nonprofit corporation that addresses generic drug shortages and high prices of lifesaving pharmaceuticals. Nearly two dozen major health systems organizations, representing 750 U.S. hospitals, and philanthropic organizations provide Board leadership and much of its initial capitalization. By sub-contracting with an existing FDA-approved manufacturer, Civica Rx plans to bring 14 hospital-administered generic drugs to market in 2019.  In this “make-or-buy” scenario, several health care systems have created a mutually owned, nonprofit entity whose primary purpose is to secure contractually for its members a supply chain of generic drugs at a lower price (generated through economies of scale production). Eventually, Civica Rx plans to integrate vertically backwards, owning its own FDA approved generic manufacturing facilities (with an objective of reducing their drug prices by 35 to 50 percent), thus limiting any opportunistic behavior that generic manufacturers under contract could engage in.

The FDA’s Interagency Drug Shortage Task Force will have an opportunity to recommend policies that will enhance regulatory and market conditions, including enhanced manufacturing transparency quality, innovative contracting arrangements, and targeted tax incentives. Yet the health care systems cannot wait for, nor depend on, federal government intervention to solve this problem, and are instituting market-based solutions, including industry best practices and innovative organizational arrangements, to ensure a safe, consistent and lower cost supply of generic drugs for their patients.

Thomas A. Hemphill is David M. French Distinguished professor of strategy, innovation and public policy in the School of Management at the University of Michigan-Flint.

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