Margaret Hamburg, Commissioner of the Food and Drug Administration, at a May 18, 2010 United Nations... [+]
One of the most serious problems in American health care today is a catastrophic shortage of supply for dozens of important generic drugs, especially certain injectable medications that form the backbone of modern cancer chemotherapy. As a result of the shortages, many cancer patients today are unable to gain access to basic, life-extending drugs that cost less than a bottle of Coke. Today, the House Oversight Committee released an in-depth report, alleging that a significant cause of this shortage is an out-of-control regulatory smackdown, initiated by FDA Commissioner Margaret Hamburg.
The report, commissioned by Oversight Committee chairman Darrell Issa (R., Calif.), details the dramatic drop in the production of generic injectable drugs since Hamburg was confirmed as FDA chief in May 2009. Upon taking office, Hamburg promised an aggressive effort to enforce the FDA’s stringent manufacturing standards. In 2010, Hamburg’s officials issued 673 warning letters to drugmakers and other companies: a 42 percent increase from 2009. In 2011, the agency issued 1,720 warning letters: a further increase of 156 percent.
An FDA regulatory explosion shut down cancer drug production
The impact of Hamburg’s enforcement actions was swift and dramatic. Of America’s five largest manufacturers of generic injectable drugs—APP,
Scott Gottlieb, a former deputy commissioner of the FDA, testified to Issa’s committee that the FDA went overboard in its orgy of enforcement. “Instead of calling for targeted fixes of troubled plants, the agency has often required manufacturers to undertake costly, general upgrades to facilities. As a result, in 2010…regulatory actions taken by the FDA to address these problems were involved in 42 percent of the drug shortages.”
Issa’s investigators found that a big part of the problem was that the FDA’s inspectors were not required to consider the broader effects of their actions. “According to sources with inside information about FDA’s operations, there is a disconnect between the FDA field force, the inspectors who work out of the agency’s district offices, and scientists and other career individuals at FDA headquarters who work on review and compliance functions,” Issa writes. “According to the Committee’s sources, FDA’s field force does not believe that it is within the scope of their authority to worry about the implications of their actions, even if it means a manufacturer closing a facility or removing manufacturing lines from production.”
Medicare price controls create unintended consequences
Margaret Hamburg’s blizzard of warning letters exacerbated a pre-existing condition affecting the generic cancer-drug market: price controls instituted by the Medicare Modernization Act of 2003. That law, which is best known for its installation of a prescription-drug benefit for Medicare, changed the way in which Medicare paid for injectable drugs under its traditional Part B, or outpatient, program.
Prior to 2003, Medicare paid for drugs using a pricing formula called “average wholesale price,” or AWP. But the problem was that the AWP price that Medicare used was often far higher than the actual market price of a drug, allowing doctors to make huge profits by billing Medicare—and thereby taxpayers—for fictitious drug costs. “Doctors were making a living off of this,” says Ajay Mantha, who studied this problem when he was at McKinsey.
As a result, the Medicare Modernization Act reformed the way in which the government paid doctors for injectable drugs. Today, Medicare uses a formula called “ASP plus 6,” in which doctors are reimbursed at the actual reported average selling price of a drug, plus 6 percent. In addition, in order to limit drug-price inflation, the law limited increases in ASP to six percent every six months.
But these reimbursement changes had unintended consequences when applied to generic drugs. As drugs go off patent, the price of a typical generic drug goes down dramatically: around 90 percent after one year. In many cases, it literally becomes cheaper to pay for cancer chemotherapy than to buy a bottle of Coke. Ondansetron, a drug used to treat chemotherapy-induced nausea and vomiting, used to cost $3.71 per injection when it was on patent. Within one year after the drug’s patent expired, an injection cost 28 cents.
FDA regulations + Medicare price controls = drug shortages
But injectable drugs require special manufacturing costs. “Injectable drugs often need to be lyophilized,” or freeze-dried, “which is extraordinarily expensive—the machine costs around $100 million,” says Mantha. “It’s a big capital expenditure.” On top of that, companies had to deal with the blizzard of new FDA enforcement actions I discussed above.
Hence, there comes a point at which these drugs get so cheap that companies can’t make a profit on them. So they stop making them. That, in turn, leads to a drug shortage.
But in a normal market, whenever you have a shortage, manufacturers can raise prices, in order to restore their incentive to supply more product. But because of Medicare’s 6 percent cap on price increases, suppliers had no ability to raise prices to respond to doctor and patient demand.
Says pharmaceutical consultant Walter Kalmans, “Because MMA limits price increases to 6 percent semi-annually, prices do not reach an equilibrium. Even worse, the profit potential of these drugs is so low, new [generic] entrants decide to stand on the sidelines, or focus on more profitable products.” A report from the Department of Health and Human Services noted that “average prices decreased in every year leading up to a shortage. In contrast, the average prices of drugs that never experienced a shortage over this period did not change substantially either in the earlier or later period.”
One company told Issa’s committee that of the two dozen or so cancer drugs they make, approximately three quarters are sold at a loss. “The MMA and other government pricing policies have had unintended consequences affecting our ability to make a reasonable profit margin, not only for our oncology products but also for certain other products.” Because cancer disproportionately affects old people, it’s cancer drugs where the MMA effect is most pronounced.
It’s not that hard to fix this problem
Last October, in response to this growing problem, President Obama issued an executive order aimed at “reducing prescription drug shortages.” But it doesn't get at the real problem. The order required drug manufacturers to “provide adequate advance notice of manufacturing discontinuances,” asked the FDA to “expedite its regulatory reviews” so as to “avoid or mitigate existing or potential drug shortages,” and punish manufacturers who “stockpile the affected drugs or sell them at exorbitant prices.”
Similarly, the recently passed Prescription Drug User Fee Act legislation contains some language regarding drug shortages, but again the emphasis is on early warning of shortages, and speeding up FDA reviews, rather than on the real problems: excessive regulatory interference, and Medicare's price controls.
As a former generic-drug CEO says below, "it seems somewhat ironic that the FDA is being empowered to cure a crisis they may have had a hand in creating."
Real reform would start with aggressive Congressional oversight of the FDA’s issuance of warning letters. Congress should let the FDA know that it will face scrutiny every time it issues a warning letter, especially when that warning letter would impact the supply of generic injectable drugs.
Secondly, Congress should eliminate, for generic drugs, Medicare’s limitation on semi-annual price increases. Generic drug prices should be able to float freely in the marketplace. Because there are so many suppliers of a given drug, prices will reach a competitive equilibrium on their own.
The government spends trillions of dollars a year subsidizing the cost of health insurance. But there’s no point in having health insurance if you can’t get the medicines you need to stay alive. There is simply no excuse for Washington to sit idly by as this unprecedented drug shortage gets worse.
Follow Avik on Twitter at @avik.
UPDATE 1: In the comments, my co-blogger John R. Graham provides a link to a 16-page report on the same topic that he published yesterday through the Mackinac Center. John believes that price controls did not play a pivotal role in creating shortages, and that the FDA is the root of the problem.
Meanwhile, the FDA has put out this statement in response to the Oversight Committee report:
Preventing drug shortages is a top priority for the FDA. In the seven months since the President’s Executive Order, FDA has made important progress on drug shortages. Early notification by manufacturers has made a huge difference in our ability to prevent these shortages. More than 150 shortages have been prevented since the Executive Order and the agency has prevented more than 50 shortages so far in 2012 due to early notification from manufacturers, which is voluntary.
We recognize that the problem of drug shortages is complex and stems from an interconnected series of factors. However, manufacturing and quality problems continue to account for the majority of current shortages. These issues have mainly occurred with sterile injectable drugs.
Patients expect and deserve high quality drugs. It is the manufacturer's responsibility to ensure that their products are safe, effective, and high quality, which includes complying with relevant laws and regulations. FDA is committed to working with industry to quickly resolve any quality or manufacturing problems that arise to ensure continued patient access to vital safe and effective medicines.
An FDA spokeswoman suggested I provide a link to this report from the U.S. Government Accountability Office, which states that "the drug shortages we reviewed in detail were generally caused by manufacturing problems and exacerbated by multiple difficulties" and that "FDA is constrained in its ability to protect public health from drug shortages. Specifically, FDA is constrained by its lack of authority to require manufacturers to provide the agency and the public with information about shortages, or require that manufacturers take certain actions to prevent, alleviate, or resolve shortages."
UPDATE 2: A former generic drug-maker CEO wrote me with these insights into the FDA's regulatory process:
I would be surprised if the shut-down of facilities in the recent past couldn't be traced to inspections initiated by some compliance program. My thinking is that FDA determined that there was new technology available, say better particulate detection/inspection equipment, and crafted a new program to go out and see if all of the industry was "current" with it.
As usual, they sent out the compliance program, which triggered inspections at injectable manufacturers. What they may have found was that the industry wasn't as "current" as they'd like, and in today's environment of wanting to increase enforcement actions, they moved against all of them, resulting in the near simultaneous shutdown of an industry. I don't mean to infer it was intentional, just that no one stopped to consider the supply ramifications before acting.
Wouldn't the better approach have been to "educate" industry, or at least advise them that a new standard was established and allow for some time to acquire, install and validate the new systems?
While industry should adopt better technology that provides meaningful quality improvement, it seems like the old methods were functioning well enough that a different approach could have been taken. I haven't heard of any huge number of quality complaints that spurred FDA into action.
The product fallout from this is actually to be expected. Injectable product costs are very reliant on volume and as production volume in a facility goes down costs go up. This means either prices go up or, if the market won't bear it, products get discontinued.
Additionally, as new manufacturing systems come on-line, there usually is limited capacity, so high margin products are likely to be prioritized. There also comes a time when decisions have to be made as to whether manpower should be used to reintroduce older, marginal products or prepare for upcoming new product launches (it's often the same people working on both). New product launches will almost always be a higher priority.
Anyway, these are just some thoughts I've had that I wanted to share, since it seems somewhat ironic that the FDA is being empowered by the President and Congress to cure a crisis they may have had a hand in creating.
