Drug shortage crisis

The shocking origins of America's deadly drug shortages


By now, most of us are aware that our health care system has been compromised yet again.

This time it’s a crisis born of a seemingly never-ending number of unexplained drug shortages. We have heard the horror stories and seen the faces of children suffering from leukemia and other forms of cancer, unable to get their hands on the medications that could save their lives or at least ease their pain. We’ve been made aware of breast cancer victims postponing necessary treatments for lack of a certain drug. And then there are the heart attacks, people dying from something that could and should have never happened if only the inexpensive, preventive medicines had been available. As with all tragedies resulting from some human shortcoming such as incompetence, greed or the longing for power, we need, even demand, someone to blame, but who?

Thanks to the world’s largest drug manufacturers, our elected officials and a media environment addicted to good visuals and easy answers, we have been given a culprit in recent weeks, a dastardly collection of small medical distribution companies collectively referred to as the “gray market.” These companies make their profits in the secretive shadows of the mainstream pharmaceutical sector.

Even though the gray market has actually been around for decades, its participants are becoming far more active and visible as the shortage crisis worsens. As a result, they are being offered up for slaughter by nearly every politician these days, from President Barack Obama on down. And why not? Low-hanging fruit is a staple on the political food pyramid, and these gray market distributors are easy to digest. They’re an electioneering gift like Willie Horton, something you can kick hard and be assured that everyone will applaud. And no one is arguing that these pharmaceutical shadow-dwellers don’t do unsavory things.

For instance, if you can’t find a particular medication that’s in short supply, and you absolutely need it to keep your child or partner or mom or dad alive, the gray market is where your health care provider will likely turn when all else fails. And chances are these opportunistic distributors can get you what you need. The catch is that on the gray market, the drug may cost hundreds of times its original price. (See “Drug shortage price gouging”) It may be mislabeled, counterfeit, or no longer safe to put in your body from having been stored or transported improperly. In fact, the only thing you can count on for sure from the gray market suppliers is that the drug will ultimately find its way to the highest bidder willing to take a chance on their products.

But paying more can’t always solve the problem. When he last checked the status of generic cancer drugs on the market in August of this year, Dr. Ezekiel J. Emanuel, chairman of the department of medical ethics and health policy at the University of Pennsylvania, found that 14 of the 34 drugs were in short supply. Some of the 14 unavailable drugs are necessary for the treatments to cure leukemia, testicular cancer and lymphoma. It is no wonder that when faced with such diseases and no drugs to treat them, people will at least attempt to find them on the gray market.

Desperate times call for desperate measures, and recent research offers evidence that this is driving the market. It seems the more integral a medication in short supply is to a person’s survival, the higher the prices can go. So it should come as no surprise that this market of desperation has resulted in oncology and other acute-care drugs comprising the top 10 most exploited-by-price medications.

What may come as a surprise, however, is that these disturbing examples of capitalism at the point of a gun may be little more than a diversion, a smokescreen, if you will, that hides from view the real and considerably more complicated truth behind the current drug shortage crisis.

The problem

Understanding, let alone solving, the drug shortage problem is a challenge, because it seems to be as much about politics as it is about supply and demand. The issue’s complexity makes it easy to lose sight of the fact that this is first and foremost a human tragedy. People have died. An Associated Press review identified 15 deaths in just the last few months, and more people will no doubt die or be forced to live in pain simply because they can’t get the medication they need even though it exists — or did exist, until someone inexplicably quit making it or started hoarding it.

The number and variety of unavailable drugs on the market ebbs and flows with little rhyme or reason, leaving even the academics studying the matter at a loss.

“The issue is very complex and we just don’t know the reasons. For 10 years, we’ve tracked the shortages, and the manufacturers never say why there are shortages,” says Dr. Erin Fox, manager of the University of Utah’s Drug Information Resource Center (DIRC), the nation’s foremost database for tracking pharmaceutical shortages.

The experts may not know all the reasons why drugs disappear from the market, but they do know that the problem is bad and getting worse.

In 2010, it was reported that approximately 240%uFFFD drugs were in short supply and another 400 drugs were on back order by the end of the year. This year, according to DIRC, we are expected to have shortages on as many as 360 different drugs, which would make 2011 the worst year in history for such unavailability. Making matters worse, most of the shortfall is impacting medications that are needed for chemotherapy, emergency care and anesthesia. (See “Local oncologist, patient have firsthand experience with short supply”)

Over a two-week period in April, Premier Healthcare Alliance analyzed the incidence of gray market offers being made to its members. Premier documented 1,745 examples of offers for unavailable or back-ordered drugs. On average, the drugs were priced at a 650 percent markup to the drugs’ regular price, with some drugs being offered at more than 4,000 percent price increases. In all, the offers documented by Premier were made by 18 different gray-market vendors. One local Colorado company, Superior Medical Supply, has found itself part of a congressional investigation. The Committee on Oversight and Government Reform has repeatedly requested that the company supply it with documents pertaining to its business practices. So far, Superior has failed to furnish the requested paperwork to Congress. (See “Local supplier under fire”)

So just how big a problem is this gray market drug debacle, in dollars? Depending on whom you ask, the answer can range from “really big” to “insignificant.” That’s because on the economic side of things, most people — Bill Gates, Tim Geithner and Warren Buffett aside — have a hard time comparing things that end in “illions.” For most of us, $500 million, $500 billion and $500 trillion all start to sound the same coming from the mouth of a politician, CEO or Wall Street type. But they are nothing alike when it comes to grasping the issues within the pharmaceutical industry.

According to Amanda Forster, senior director of public affairs at Premier, the gray market’s inflated pricing costs the health care industry approximately $200 million a year. Forster also points to recent research by the American Hospital Association that identified an additional $213 million in extra costs associated with the training of staff in the use of replacement drugs, and the time spent searching the gray market for needed medications. So, on the surface, the gray market issue weighs in as approximately a $413 million problem. Seems significant enough, until you consider the size of the global pharmaceutical market.

In 2011, the estimated size of the global pharmaceutical market is approximately $900 billion, and it is expected to grow to $1.1 trillion by 2014. So the gray market that is garnering so much attention from our elected officials these days actually represents 0.00046 percent of the overall pharmaceutical market. It’s a number so small it’s hard to fathom how it found its way onto the congressional radar. In fact, as a matter of perspective, consider that the overall losses attributed to the gray market ($413 million) are only about half as much as the $800 million the pharmaceutical industry spends each year just to fill the campaign coffers of politicians and lobby for industry-friendly legislation. It seems the pharmaceutical industry is second to none when it comes to keeping government off its back and out of its business, which may help to explain why recent attempts by politicians to deal with the drug shortage crisis can look more like political theater than problem-solving.

Washington non sequitur

We know the problem. We have a supply dilemma for a growing number of drugs, particularly low-cost generics that are increasingly becoming unavailable to health professionals and their patients for a variety of reasons. (See “Pharmacists describe local effects of shortage”)

The proposed solution coming out of Washington is to pass legislation that would make manufacturers warn us when a drug is going to become in short supply, and to hold hearings to berate the gray-market suppliers who make excessive profits because of the shortages.

In other words, the drug shortage solutions coming from inside the Beltway don’t actually address the drug shortages at all. For instance, Colorado Rep. Diana DeGette is the co-sponsor of a pending bill that would require drug manufacturers to notify the market that a drug will be in short supply six months before the shortage occurs. Failure to do so would result in a $10,000-per-day fine.

First of all, ten grand is hardly a fearful penalty for an industry doing more than $2.5 billion a day in business. In fact, it’s equal to about an hour’s worth of interest at 3 percent, compounded annually. Perspective.

Critics also point out that giving notice that a drug will be in short supply could cause earlier hoarding of the drug by the larger hospitals and the gray-market suppliers as well, likely exacerbating an already difficult situation and pushing prices even higher. So why address a symptom instead of the disease?

Why not attack the real problem behind the shortages with legislation aimed directly at the pharmaceutical manufacturers? It’s a question no one in Washington who has to periodically run expensive political campaigns seems eager to answer. Like many of her colleagues, Congresswoman DeGette gets more of her campaign funding from the pharmaceutical/health products sector than any other single industry source, according to the website Maplight, which tracks the influence of money in politics. (DeGette was traveling and was not available for an interview with Boulder Weekly.)

So let’s try again. Why exactly are there so many shortages, and why does it seem that only certain categories of drugs are being affected? As DIRC’s Dr. Fox accurately points out, the only people who can answer this question with authority on a drug-by-drug basis are the manufacturers themselves, and they aren’t talking. We know that there are raw material issues, line closings due to contamination or equipment failure, compliance issues, not enough FDA inspectors, and so on. There are also issues of too few competitors in the marketplace, manufacturers choosing to produce more profitable drugs over less profitable ones, and other problems that stem from economic decisions. It is complicated.

If government wants to fix the problem, it must force drug manufacturers to provide detailed, specific and verifiable (no self-reporting loopholes) explanations for each and every shortage that occurs, and also address market issues such as consolidation and pricing.

So why would the industry oppose divulging all of the reasons for its shortages? One answer is that publicly traded companies that make drugs and have paid good money to politicians to protect their business interests understand how they would be viewed by a growing public movement sick and tired of corporations that place profits above people. Think Occupy Johnson & Johnson.

After all, what company would want to report that a drug shortage had occurred because it chose to use its limited facilities to manufacture a highly profitable drug at the expense of a less profitable or even money-losing generic medicine, even though it knew that people could potentially die or become ill as a result of that decision? The truth doesn’t always make a good brochure. Just ask the banks.

We know profit-driven manufacturing decisions that cause shortages are being made by the industry every day. We just aren’t sure how much of the problem they represent. “Manufacturer production decisions can cause shortages,” the FDA says in a brochure written to help health care professionals plan for shortages. It further states, “Occasionally, manufacturers temporarily or permanently reduce production amounts of certain drug products as they shift production or reallocate resources to other products. An apparent practice among some manufacturers has been the halt of production when annual quotas are met. A manufacturer’s reasoned, sound business decision to discontinue production of a drug product because of insufficient financial return can cause a shortage.”

Even government regulators understand that profitable drugs sometimes take manufacturing priority over not-so-profitable drugs. (See “Potential causes of drug shortages”) But what they don’t know is just how often it happens and what percentage of the total shortages are caused by these profit-motivated decisions.

In an opinion piece he wrote in August of this year for The New York Times, Dr. Emanuel, an oncologist as well as a professor, made the following observation: “Only about 10 percent of the shortages can be attributed to a lack of raw materials and essential ingredients to manufacture the drugs. Most shortages appear instead to be the consequence of corporate decisions to cease production, or interruptions in production caused by money or quality problems, which manufacturers do not appear to be in a rush to fix.”

But in a country like ours that is driven by market forces such as supply and demand, the current drug shortages make no apparent sense. If a drug is in demand, its price should rise until it offers appropriate incentive to be produced, and the demand is certainly there for most of the unavailable drugs. After all, we have seen that when it comes to lifesaving medications, money is no object and people will pay as much as 4,000 percent premiums to get them in their hands. So why is it that the market seems to be broken when it comes to pharmaceuticals?

In fact, it could be argued that the gray market, which has no ability to actually increase the amount of a drug being manufactured, is functioning in a rational, if not moral, manner, unlike its mainstream counterpart. Once again the answer is, at least in part, political.

Good intentions, bad results

Over the past few decades, at the same time there seemed to be a never-ending rise in the costs of medications, the pharmaceutical industry was being transformed. Like other global industries such as oil, media and agriculture, the pharmaceutical sector was consolidating into fewer and fewer, larger and larger companies. As competition waned, prices and profits naturally increased. All was going according to plan until about a decade ago.

According to Dr. Fox at DIRC, we now live in a world where “a very small number of companies, five to seven, make most of the drugs, and the three largest distributors control nearly all of the supply.” Under normal market conditions, this drive toward consolidation would be expected to increase the price of drugs, but not necessarily cause any shortages of drugs, but we got both. So what went wrong?

During the same time period that the prices of pharmaceuticals were exploding upward, we began to hear the political mantra that Medicare and Medicaid were going to bankrupt the nation. And it was true. But still, the drug manufacturers were having a field day.

For drugs that were administered by physicians, such as oncology or anesthesia medications, the doctor or hospital pharmacy would purchase the drug and then bill Medicare or an insurance company for the cost. Drug companies were able to charge very inflated prices, and, as is often the case when other people’s money is being spent (in this case taxpayers’ money), no one complained. But the world changed and the abuses became intolerable.

With federal budget deficits returning following the events of 9/11, we crossed a political threshold. Washington actually found the political will, albeit temporarily, to try to stop at least some of the bleeding from Medicare. But no one saw the perfect storm gathering on the horizon.

What happened next may well account for many of today’s drug shortages, and it helps explain what happened to supply and demand as a force in the drug market. In response to the excessive drug costs to the Medicare program, Congress passed The Medicare Prescription Drug, Improvement and Modernization Act of 2003.

The short version is that the act forced drug-makers to charge lower prices to Medicare and, more importantly, due to the demands of the act for verification, etc., the price of the drugs could not rise by more than 6 percent every six months. Insurance companies followed suit, using the Medicare prices as a guide.

What this meant for the drug manufacturers is that older generic drugs that had their prices frozen in time by the act were quickly becoming marginally profitable or money-losing to produce. Since newly developed drugs are branded and come under the act’s control at much higher prices, they are much more — often hundreds of times more — profitable to produce than the older generic drugs. While it’s true that most generic drugs are produced by manufacturers that specialize in such low-cost medicines, even their generic world is comprised of different levels. There are drugs that are money-losers, drugs that make pennies in profit, and still others that are quite lucrative to produce.

So due to the influence of the 2003 act, every drug that is eventually offered as a generic runs the risk of one day finding itself in short supply as its price falls.

Dr. Emanuel explained it this way in his recent New York Times opinion piece. He writes, “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.”

Unfortunately, being a more profitable drug doesn’t mean being a more effective drug or a more in-demand drug.

Dr. Emanuel continues, “The sad fact is, there are plenty of newer brand-name cancer drugs that do not cure anyone, but just extend life for a few months, at costs of up to $90,000 per patient. Only the older but curative cancer drugs — drugs that can cost as little as $3 per dose — have become unavailable. Most of these drugs have no substitutes, but, crazy as it seems, in some cases these shortages are forcing doctors to use brand-name drugs at more than 100 times the cost.”

The evidence suggests that with the passage of The Medicare Prescription Drug, Improvement and Modernization Act of 2003, the market forces that should have guaranteed that lifesaving drugs will continue to find their way to patients as long as demand exists were rendered impotent.

Having created at least part of the problem, Congress needs to act. No one is suggesting that gray-market reforms such as those currently being explored are not needed, but in the big picture, the gray market’s role in the drug shortage crisis is at most microscopic. The larger problem is that in its effort to save the taxpayer dollars that were being misspent on drugs through Medicare, Congress became a co-conspirator in the drug shortage, along with the pharmaceutical manufacturers.

There can be no doubt that some drug shortages are truly unavoidable and outside the control of the drug-makers. But there is also no question that many of the shortages are the result of companies choosing profits over people.

When asked by Boulder Weekly what he would do to fix the drug short age crisis, Emanuel suggested several things. First, he believes it is imperative that the government should get out of the business of pricing drugs. He says that this would ensure that manufacturers, particularly those making inexpensive generics used in cancer and other critical care areas, would maintain the financial incentive needed to ensure an adequate supply of the drugs. He also thinks that the FDA needs more inspectors for the sector, so that whether it’s a manufacturing line that goes down or a regulatory concern that causes a delay, the problem can be remedied in a more timely manner than is happening currently. But it’s easier said than done.

Imagine the difficulty of any politician taking such actions at this time.

What elected leader would want to be viewed as trying to increase the profits of the already rich and powerful drug companies? And suggesting that we add more FDA inspectors translates to increasing the budget of a government agency, not exactly a popular position in the current political environment, where cutting off your nose to save your face doesn’t go quite far enough for some folks. But what choice do we have?

The immoral profiteering of the gray market suppliers is an emotional and frustrating issue that needs to be addressed, but it is only one ingredient in the complicated mix that is causing the deaths and pain of the men, women and children who cannot get the drugs they need. While not every shortage can be avoided, many can. The largest contributors to the drug shortage crisis are the drug manufacturers that choose to under-produce some of the less-profitable lifesaving drugs to make more lucrative medications, and the politicians who have created the environment where such decisions are both allowed and even rational in economic, if not human, terms.

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