Shades of gray

Drug shortages have fueled questions about thousands of secondary distributors that provide hospitals and pharmacies with back-ordered drugs, often asking more than 10 times a product's average wholesale price.

Hospital pharmacists and others in the industry are disconcerted by the lack of uniformity in the secondary market—referring to the businesses they view as less than savory as gray-market vendors—with some companies authorized by manufacturers and accredited by a national association and others with histories of revoked pharmacy licenses and allegations of price-gouging.

“There's a lack of information,” said Michael Cohen, president of the Institute for Safe Medication Practices. “There's not a certification system or a sanction from all of our major group purchasing organizations that these guys are OK.”

Only Kentucky, Maine and Texas have price-gouging laws that cover drugs. With no federal statute in place, regulation of drug prices does not fall under the Federal Trade Commission's purview, according to an agency spokesman.

In fact, it is not clear that any agency regulates the secondary drug-distribution market at the federal level. The Food and Drug Administration said it does not; the Drug Enforcement Administration said it regulates only companies that distribute controlled substances, which include some prescription drugs such as narcotics or stimulants.

Last week, Rep. Elijah Cummings (D-Md.) identified five secondary drug distributors that he says buy and sell drugs in short supply and requested information about their business practices. The closely held companies targeted by the lawmaker's letters are Allied Medical Supply, Miami; Superior (Colo.) Medical Supply; Premium Health Services, Columbia, Md.; PRN Pharmaceuticals, Rockville, Md.; and Reliance Wholesale, Miami.

Cummings said in the letters that he is concerned the companies are engaging in “drug speculation.”

“It's just not true,” said Steven Greenwald, CEO of PRN Pharmaceuticals. Greenwald said because PRN has to buy drugs at higher prices—PRN does not purchase from the large wholesalers—it also has to sell its products at a higher rate than hospitals and pharmacies typically pay.

A statement from Allied Medical Supply said the company will cooperate with the investigation and that it plays “a vital role” in ensuring hospitals and patients get the drugs they need.

Several solicitations sent to hospitals show that some distributors have offered drugs in short supply at substantially higher prices that what a hospital may receive on contract with its wholesaler. The number of drug shortages, which has steadily increased since 2006, is on track to exceed 280 this year.

An offer provided by a hospital pharmacist to Modern Healthcare shows that Premium Health Services charged $277 for acetylcyst, a mucolytic used to thin mucus secretions in the lungs and bronchial tubes, which has an average wholesale price of $19.56.

A solicitation sent by Superior Medical Supply to another hospital priced doxorubicin, a chemotherapy drug, at $125 per vial, as compared with the hospital's contracted price of $25.48.

In 2008, Superior Medical Supply agreed to pay $200,000 to the DEA to settle allegations that it violated the Controlled Substances Act by keeping incomplete records and selling large quantities of hydrocodone to retail pharmacies and failing to report the orders. The company denied the allegations. Earlier this year, the Tennessee Board of Pharmacy deferred granting a license to Superior Medical Supply in the wake of additional allegations made by California's pharmacy board.

Calls to Superior Medical Supply and Reliance Wholesale were not returned.

Dan Herlihy, owner of Premium Health Services, said in an e-mailed statement that he has met with Cummings' staff on several occasions, in part because of the company's efforts to enact a federal pedigree law. “I look forward to meeting Congressman Cummings to highlight the inefficiencies that have led to the shortages we are facing,” Herlihy said. “That would include the role of the GPOs and their effect on industry pricing and product availability.”

A chief complaint among secondary distributors is that they are required to provide drug pedigrees that track the purchase of a drug. The requirement does not extend to wholesalers and authorized distributors of record.

Generally, pharmacists say that distributors do not provide information about where they obtain drugs, unless they are operating within a state that has a pedigree law (Oct. 3, p. 14). Secondary distributors purchase drugs from a number of sources, including manufacturers, other wholesalers, hospitals, pharmacies and physicians offices.

“These are the kinds of things that you hope the manufacturer and the authorized distributors are monitoring,” Cohen said.

Some companies, such as Superior Medical Supply and Premium Health Services, are authorized vendors for Hospira. Superior is also authorized to work with Merck. But concerns about price-gouging have led some manufacturers to sever connections to secondary distributors.

Hospira and APP Pharmaceuticals have said they cut ties with distributors involved in the gray market. An APP Pharmaceuticals spokeswoman said in an e-mail that the company recently informed seven companies suspected of gray-market activity that it will no longer work with them.

“In a further attempt to prevent its products from being distributed by gray-market re-sellers and to discourage price gouging of drugs currently on shortage, APP Pharmaceuticals sells to authorized wholesalers and distributors,” said spokeswoman Debra Lynn Ross. “In addition, healthcare facilities that purchase direct from APP must go through the company's account approval process and continue to be in good standing with each order placed.”

A 2007 news report found that about 5,500 wholesalers made up an estimated 5% to 10% of the drug distribution market, while McKesson Corp., Cardinal Health and AmerisourceBergen Corp. controlled about 90% to 95% of the market.

At the state level, more attention is paid to regulating secondary distributors. State boards of pharmacy are responsible for licensing distributors in states where the companies are headquartered and in states where they ship products. In California, there are 1,225 licensed wholesalers, including those based in the state and those with headquarters outside of California. The number also includes large wholesalers with multiple facilities within the state.

Of the estimated 5,500 wholesalers in the U.S., fewer than 500 have been accredited by the National Association of Boards of Pharmacy's Verified-Accredited Wholesale Distributors program.

Few of the 482 accredited wholesale distributors are secondary distributors, says Carmen Catizone, executive director for the NABP.

Three of the five distributors that received letters from Cummings are not listed as VAWD-accredited. PRN Pharmaceuticals is accredited, under the name Premium Rx National, while Reliance Wholesale is cited as “reaccreditation in process,” according to the program's website.