With much fanfare and media attention, President Obama
signed an executive order instructing the FDA to step up work
to reduce current drug shortages and protect consumers. It’s
hard to argue with exercising presidential leadership to ensure
cancer patients don’t die waiting for drugs that could
save their lives. The problem is the executive order will
aggravate the conditions causing the shortage.
The executive order notes, “An important
factor in many of the recent shortages appears to be an increase in
demand that exceeds current manufacturing capacity.” So the order
directs the FDA to look for and report on potential drug shortages
earlier and more regularly, speed up the review of applications
needed to expand or start production and tell the Justice
Department when about “possible
instances” of collusion or price
gouging.
In other words, the same companies the President is
encouraging to increase production will also be suspected of
criminal activity if they work together or raise prices in ways
that — to FDA or DOJ lawyers — seem illegal. The only way to
reduce your risk of being prosecuted or investigated is to keep
prices where they are or ask permission to raise them
first.
Ironically, the drug shortages the president wants to
address were caused by a similar desire to prevent price gouging in
2003. Former Obama health adviser Ezekiel Emanuel recently
noted:
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003… required Medicare to pay the physicians
who prescribed the drugs based on a drug’s actual
average selling price, plus 6 percent for handling. And indirectly
— because of the time it takes drug companies to compile actual
sales data and the government to revise the average selling price
— it restricted the price from increasing by more than 6 percent
every six months.”
The act had an unintended consequence. In the first two or
three years after a cancer drug goes generic, its price can drop by
as much as 90 percent as manufacturers compete for market share.
But if a shortage develops, the drug’s price should be
able to increase again to attract more manufacturers. Because the
2003 act effectively limits drug price increases, it prevents this
from happening. The low profit margins mean that manufacturers face
a hard choice: lose money producing a lifesaving drug or switch
limited production capacity to a more lucrative drug.”
The result is clear: in 2004 there were 58 new drug
shortages, but by 2010 the number had steadily increased to 211.
(These numbers include noncancer drugs as well.)
Indeed, the government report on the cause of the
shortages the President mentions in his executive executive order
found that the greatest shortages and the steepest decline in
product are among the drugs whose prices have dropped since 2004.
Similarly, in the 1990s when the price of vaccines bought by the
government was capped, there was a shortage of shots for childhood
diseases. Once the price caps were lifted product
rapidly increased.
The simple solution to the shortage problem is to remove
the price controls that already exist and not adopt any policies
that would increase government’s role in setting
prices. Prices should go up. The time and cost required to produce
more drugs could go down by allowing companies to pool resources,
production lines, share inventory, etc. That’s what
sped up and cut the expense of producing anti-flu medication in
response to the possibility of bird flu pandemic in
2008. As a temporary measure, the Department of
Health and Human Services could establish a special code for
products in short supply to speed up reimbursement at rates
reflecting the urgency of the situation.
Instead, as noted the President wants the FDA to monitor
companies for evidence of collusion and price
gouging. Additionally, the administration wants
to impose price controls and rebates on all medications the
government pays for. That would force a reduction in the price
of injectible drugs other than the medicines for cancer and
infections that are already in short supply. Finally, Obama wants
to reduce the effective patent life of biotech drugs from 12 to 7
years. That could create a shortage of life saving drugs in the
future relative to the demand.
While the President’s effort to resolve the
shortage is laudable, his executive order will make the shortage
worse. And his proposal to extend price controls and reduce patent
life on all other drugs now and in the future will ensure our
nation faces a famine of pharmaceuticals for years to
come.
