How Misguided Drug Pricing Policies Worsen Drug Shortages

Drug shortages are forcing patients, physicians, and hospitals to scramble.

More than 300 medicines are in short supply across the United States. Shortages can be a matter of life and death. Generic chemotherapy drugs that treat ovarian, breast, and bladder cancer are currently in scant supply, leading doctors to ration them. 

Occasional shortages in all kinds of industries are inevitable, but these are different. For one, U.S. drug scarcity has grown steadily worse for five years. Further, it's driven by a faulty drug marketplace and exacerbated by government policies that will only compound the problem. 

Shortages tend to arise when there are few suppliers in a marketplace. Consider that, if a given product is made by multiple producers in different locations, each with its own processes and inputs, then a single event – such as a hurricane or earthquake – probably won't shut them all down. 

Ironically, a root cause of the current crisis is a "shortage" of drug buyers, rather than suppliers. Just three drug purchasing intermediaries known as pharmacy benefit managers (PBMs) control 80% of drug transactions, extracting enormous discounts and rebates from manufacturers. This near monopoly has distorted the generic drug market considerably. 

Then there's the increasingly unworkable margins generic drugmakers face. Even the FDA has blamed a "lack of incentives for manufacturers to produce less profitable drugs" for stubborn shortages. 

Together, PBMs and unrealistically tight margins are putting maximum pressure on manufacturers of generic drugs, which make up over 90% of all prescriptions filled in the United States. Unfortunately, lawmakers have done little to address PBMs, and have adopted strict drug price controls that could make it even harder for generic drugmakers to operate.

Let's first consider the market-manipulating behavior of PBMs, wholesalers and other middlemen. PBMs manage benefits and help build lists of covered drugs on behalf of employers and insurance companies, leveraging their buying power and formulary influence to extract massive payments from drug makers.

Through mergers with one another and other companies, PBMs have amassed enormous power. For example, CVS Health Corporation owns not just a chain of drugstores but also Aetna, an insurer, and Caremark, one of the biggest PBMs, as well as Red Oak Sourcing, one of the big three wholesale distributors of generic medicines.    

A system with just a few buyers picking their suppliers purely based on cost with little to no consideration of supply chain strength, manufacturing redundancies, or multi source contracts quickly becomes a race to the bottom, driving many competing suppliers away. 

That's exactly what's happened for generics. Faced with either having to offer huge concessions or be cut out of the market entirely, many manufacturers have exited specific markets or gone bankrupt in the process. This just happened in February, when generic manufacturer Akorn filed for chapter 7 bankruptcy and stopped production of about 75 generics, 6 of which were sole-sourced.

A manufacturer can only lose money on a product for so long before they abandon that product altogether. That can leave just a single producer of many generic drugs, with no competitors to fill the gap in the event of interruptions.  

The Federal Trade Commission is currently overseeing a broad investigation into PBMs' market practices. It recently expanded that probe to include the "group purchasing organizations," or GPOs, that PBMs hire to negotiate rebates with drugmakers.

The FTC's ongoing inquiry is encouraging, but it'll likely take an act of Congress to meaningfully curb PBMs' oligopoly power. So far, that hasn't happened. 

Lawmakers have made matters worse by adopting strict price controls, like those included in last year's partisan Inflation Reduction Act. Some progressive members now want to expand the IRA's policies before they've even taken effect. 

The price controls in the IRA apply to brand-name prescription drugs, but their biggest impact could be on generics. Currently, brand-name drugs sell for significantly more than generics. But the new policy will effectively squeeze brand-name prices down to the point where generic manufacturers will take a pass entirely on entering the market once brand-name drugs' patent and exclusivity periods end.

That'll have a number of consequences. For one, the IRA's "maximum fair prices" are no substitute for competitive market forces. A brand-name drug could theoretically be more expensive, even after price-setting, than generic alternatives would have been. Quite an ironic result for legislation we were told would reduce drug prices. 

Even worse, as price controls for branded medicines take hold, some generic manufacturers could decide to leave particular therapeutic areas. Fewer suppliers would mean more single-source drugs. Patients could face new shortages – including for brand-name drugs – as a result.

The first price controls will be set starting this year and take effect in 2026. But critical market entry decisions will be made well before that. Generic drugmakers are already watching their future markets dry up. Impending price controls could help explain why Teva Pharmaceuticals, one of the world's leading generic manufacturers, recently announced plans to reduce generic production considerably.

Patients are in trouble, faced with rationing doses, substituting medicines, or simply waiting for the treatments they need. Tragically, between the nefarious behavior of middlemen and the price controls coming down the pike, this crisis will get worse before it gets better.

Dan Leonard is the former president and CEO of the Association for Accessible Medicines, former president and CEO of the National Pharmaceutical Council, and former executive vice president of public affairs for America's Health Insurance Plans.