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.