Providers fuel 'gray market'

Hospitals, pharmacies and physician's offices are both buyers and sellers feeding a so-called gray market for drugs often marked up to exorbitant prices and sold to hospitals struggling with drug shortages.

The growing number of drug shortages in the U.S. has led to an increased focus on gray-market vendors and concerns about the quality and safety of the products they are selling. There were 198 reported drug shortages as of Aug. 25, compared with 211 for the full year of 2010, according to the University of Utah Drug Information Service.

“There have always been drug shortages, but it really peaked this past year,” said Michael Cohen, president of the Institute for Safe Medication Practices.

Hospital pharmacists say gray-market vendors buy drugs from hospitals, pharmacies, physician groups, manufacturers and wholesalers, and then the vendors offer to sell them to other hospitals with marked-up prices. The term is loosely used to refer to suppliers that vary from state-licensed wholesalers to less savory vendors that have reportedly supplied hospitals with expired, damaged, stolen or counterfeit products. But Cohen noted, “There wouldn't be a gray market if we knew it was all stolen.”

While some hospitals have policies in place that restrict or prohibit purchases from these sources, fears about interrupting patient treatment or pressure from physicians have influenced hospital pharmacists to buy products from gray-market suppliers.

“My understanding is that it's a last resort,” said Joseph Hill, director of federal legislative affairs for the American Society of Health-System Pharmacists. “If a patient is facing a certain death, your hand is forced.” The trade group's guidance on buying drugs in short supply does not prohibit pharmacists from using gray-market vendors but encourages hospitals to develop policies before a shortage, weigh patient risks and estimate price variations. The association doesn't actively discourage hospitals from selling drugs to vendors but it does not support the practice. “We wouldn't be in favor of it.”

Purchasing drugs from such vendors is widespread, despite well-publicized concerns about drugs that are counterfeit, stolen, expired or stored inappropriately.

The Institute for Safe Medication Practices surveyed purchasing agents and pharmacists at 549 hospitals in July and August and reported that 51% of respondents had bought one or more pharmaceutical products from sources considered gray market in the past two years. More than 13% of respondents to the survey had received solicitations to sell the hospital's medications.

Recent shortages have led to concerns that vendors are stocking up on the drugs in short supply.

Indiana University Health purchased two products from a secondary vendor last year, according to William Shaw, director of statewide pharmacy purchasing and logistics for the system. Although IU Health established a policy to avoid buying gray-market drugs two years ago, the pharmacy staff decided to purchase two products for which there are no alternatives. “We absolutely needed it,” Shaw said.

Indiana requires providers to track and authenticate drugs through a pedigree program. Twenty-nine states have passed legislation to require a drug pedigree, according to the Healthcare Distribution Management Association.

The pedigree for IU Health's purchase of epinephrine shows that the drugs were owned by a distributor in New Jersey, a pharmacy in Pennsylvania and a medical group in South Carolina before the hospital bought the medications from a state-licensed wholesaler in Tennessee.

The shortages prompted the system to hire a full-time technician to follow up on back orders of medications. IU Health hospitals also spent an additional $215,000 from February to April because they went through off-contract channels to buy drugs in short supply. Shaw said unsolicited offers from gray-market vendors are often 20 times the price of a drug purchased through a distributor's contract.

An analysis conducted by the Premier healthcare alliance found that during a two-week period this year, 1,745 gray-market offers were made to 42 acute-care hospitals. The average markup was 650%.

Lawrence Siegel, director of pharmacy services at Carroll Hospital Center in Westminster, Md., said he receives five to 10 calls a day with unsolicited offers for drugs. The 218-bed hospital buys medications from gray-market vendors when “the benefit outweighs the risk,” he said, adding that it is safer in some instances to buy a drug from a third-party vendor, rather than an alternative, which may not be used properly by hospital staff.

Earlier this year, Carroll Hospital Center purchased hydralazine injections, which normally cost $2.73 a vial, from a wholesaler the hospital has worked with before. The hospital paid $33.50 a vial, according to Siegel.

Other hospitals strictly forbid purchasing gray-market drugs. Erin Fox, manager of the Drug Information Service at the University of Utah Hospitals & Clinics, Salt Lake City, and Dwight Kloth, director of pharmacy at Fox Chase Cancer Center in Philadelphia, said their hospitals have such policies.

“It's not because of the cost issues,” Kloth said, “but the main thing is: If I can't be absolutely sure of the integrity of the drug, then I can't administer it to a patient.”

AmerisourceBergen Corp., a pharmaceutical distributor based in Valley Forge, Pa., and other large distributors buy directly from the drug companies. Buying directly helps “ensure the safety and integrity of the product and the safety of the whole supply chain,” said company spokeswoman Barbara Brungess.

A Food and Drug Administration spokesperson said the agency is aware of gray-market distributors, but regulation of the market is “outside of FDA purview.”

The drug shortage that is helping the market flourish, meanwhile, is drawing scrutiny from federal lawmakers and regulators. Bills in the House and the Senate would require manufacturers and the FDA to provide notifications about drug shortages, and the FDA has scheduled a hearing on the matter for Sept. 26. Sen. Richard Blumenthal (D-Conn.) has called for a Government Accountability Office report.

Addressing the root causes of the drug shortages will likely dampen the gray market, said Hill, of the American Society of Health-System Pharmacists. “Dealing with the shortages is the critical issue for us.”