Generic Drug Shortage

Generic Drug Shortage

Peter Paul Yu, MD, FASCO, FACP

Nov 06, 2011
The November 3rd edition of the NEJM features a Perspective article on drug shortages by Mandy Gatesman and Thomas J Smith (NEJM 365:18 page 163) that address many of the causative issues that underlie this growing national problem.  

However in my opinion the single most important reason lies in the fundamental conflict that results from having some parts of the healthcare system subject to intense regulation (providers and hospitals) and others allowed to operate in the open free market with comparatively little regulation.

The problem dates back to a law that was passed about 10 years ago regulating how generic drugs come to market. Only now are we seeing the impact of that as drug patent life expires. When a drug patent expires, any manufacturer can enter the market and many do because the profit margins on these drugs are over 90%. However, the winners are the first three or so that enter the market. The late comers serve to drive the price down so low that none can make a profit. The bottom hits when the generic drug is priced at about 1% of the original price.  At that point the generic companies exit the market and go on to another generic drug that hasn't yet hit rock bottom. The manufacturing capacity for generic drugs is limited.
Compounding this problem is that injectable drugs are much more difficult to make than oral drugs and the overall market of oncology drugs is still small compared to say Lipitor.
The Medicare Modernization Act pegged drug payments to oncologists at a figure that is 6% higher than the Average Sales Price (ASP). ASP is not what it appears to be. ASP is the price that manufacturers report to CMS each quarter on what they were paid by wholesalers. The wholesalers add their profit margin and that reduces the 6% margin the oncologist has above the manufacturer's price.  When you add in bad debt, outdating of drug before use, wastage due to cancelled treatments and the like,  an oncologist is quickly under water. The group of 12, the 12 Congressional members charged with coming up with a plan to reduce the federal debt by $1 trillion by later this month are considering reducing oncologists reimbursement to ASP +3% or lower.
The problem is that while the free market allows the price of generic drugs to freely fall as new generic companies enter the market, the ASP+6% formula does not allow the opposite to happen; that is to allow the price to rise freely as supply dries up.
The irony as the article states is that we are being penny wise and pound foolish. It would make sense to raise the margin on ASP for generic drugs.  Otherwise, oncologists cannot use cheap generic drugs and end up using very, very expensive brand drugs that are still on patent.


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