Drug Shortages and Drug Pricing Polices

A cautionary note.

There have been reported shortages of critical drugs, especially cancer drugs over the past few weeks. Drug shortages are not new, but this time the situation is quite acute and has led to drastic actions such as rationing. A number of these drugs are required for patients with advanced stage cancers. The Food and Drug Administration (FDA) tracks drug shortages and tries to mitigate them to the extent possible. The FDA is now seeking imports from China to make up for the shortfall. This is happening just as Congress is getting ready to re-authorize the Pandemic and All-Hazards Preparedness Act (PAHPA). Ironically, one of the critical lessons from the pandemic is the reliability of supply chains: can they be trusted to deliver the critical drugs Americans need in emergencies? Previously, the popular ADHD drug Adderall was in short supply. The current shortage traces its routes to manufacturer issues in India.

The causes of the current shortage are many, ranging from production bottlenecks to production shutdowns. Typically, the drugs that are in shortage are generics. The generic drug market is one of the most impactful policies in recent times. In the US, about 90% of all drugs are generics, which cost significantly less than their brand-name equivalents. Consequently, the prices for generic drugs keep falling — and therein lies the problem. Technically the barrier to entry to manufacture generic drugs is very low, which results in very low profit margins. As a result, it is unprofitable to produce them in rich countries like the US, which has high labor and regulatory costs. That’s why most generics are outsourced to cheaper production hubs like India and China.

But with the outsourcing of drugs comes another concern: How do we ensure safety of the drugs (the primary role of the FDA)? A significant number of shortages are due to the shutdown of manufacturing plants because of quality violations. Folks will remember the baby formula shortage instigated by the shutdown of the Abbott factory in Michigan. And the safety concerns can’t be downplayed. Recently, there were several reported deaths in Gambia, Thailand, and other countries caused by contaminated children’s cough mixture, which was manufactured in India. While investigations are still ongoing, the preliminary findings suggest that there must have been some contamination in some of the ingredients. Production from the offending plant was halted.

We should be prepared to pay more for some drugs that are priced incredibly low. I was recently treated for a strep infection. I paid $0.89 for an antibiotic treatment course. This is a condition that was a death sentence prior to the discovery of effective antibiotics. It left me wondering — would I pay more than 89 cents to live? How about $100 or even $500 if my life depended on it? Are we going to ensure supply chain resilience as recommended by various legislators and stakeholders without some manufacturing in the US? But with such low profit margins, why would any pharmaceutical company want to make such critical medicines in the US?

The Inflation Reduction Act (IRA) seeks to reduce the cost of pharmaceutical drugs paid by Americans. It seeks to achieve its goal by coercing pharmaceutical companies who produce brand-name drugs to offer steep discounts to the government. The issue of drug pricing is complex. Typically for each drug that makes it to the market, about 11 others fail. I will not hold water for any company that arbitrarily raises prices. However, we must think of the price of pharmaceutical drugs not in terms of a single drug, but an entire menu of drugs that are essential for our survival.