Taking aim at shortages

Manufacturers have few incentives to increase production of scarce generic drugs, despite a record-breaking number of drug shortages and new market-led recommendations from the Obama administration.

Last week, President Barack Obama issued an executive order that strengthens the Food and Drug Administration's enforcement authority and staff resources. It also encourages manufacturers to voluntarily notify the agency about potential shortages, a proposal that mirrors bills in both chambers of Congress that would require drug companies to notify the FDA of a shortage or disruption at least six months in advance.

In a coinciding report, HHS recommended that the FDA expedite reviews related to manufacturing capacity and policymakers balance their short-term regulatory responses with possible risks of reduced competition in the future.

A third recommendation encourages group purchasing organizations and insurers to strengthen failure-to-supply clauses in contracts with manufacturers. Failure-to-supply clauses allow hospitals to recoup the difference they pay after making an off-contract purchase, usually at a higher price. On average, only 10% of losses are recouped from failure-to-supply requirements.

In exchange for accepting the more stringent clauses, manufacturers would raise

drug prices and subsequently increase production capabilities.

Curtis Rooney, CEO of the Healthcare Supply Chain Association, said the trade group supports the executive order, but the recommendation raises some concern for GPOs. Fewer failure-to-supply clauses have been included in contracts as a result of the shortages, and manufacturers will often not agree to cover incremental costs if the GPO has contracted with more than two manufacturers, Rooney said by e-mail. At this point, hospitals are “just grateful for the supply,” he said.

It's a sentiment echoed by the American Hospital Association. Roslyne Schulman, the AHA's director of policy development, said hospitals may be willing to accept an increase in drug costs, depending on drug availability and the difference in price points.

Manufacturers have said they are working to reduce the shortages. “The generic industry is resolute in its commitment to work with all components of the supply and provider network to dramatically decrease current shortages and mitigate factors that could contribute to future shortages,” Ralph Neas, president and CEO of the Generic Pharmaceutical Association, said in a statement. The association declined to comment further.

In a perspective piece published in the Nov. 3 issue of the New England Journal of Medicine, pharmacist Mandy Gatesman and oncologist Dr. Thomas Smith wrote that without national intervention or federal market regulation, reimbursement reform is necessary to address the scarcity of oncology drugs, which make up nearly 30% of current shortages. One factor that makes the oncology drug market unique is that oncologists are reimbursed differently by the CMS. Since 2003, the reimbursement rate for an oncology drug is the average sales price plus a 6% markup, which oncologists pocket to cover practice costs. The authors say that more than half of an oncology office's revenue may come from chemotherapy sales and the policy has reduced demand for generic oncology drugs.

To combat shortages of oncology drugs, Gatesman and Smith recommend setting a floor for the average sales price of a generic drug to encourage ongoing production; paying practices disease-management fees rather than rates based on drug sales; or employing salaried physicians.

“To ensure a predictable supply of generic cancer drugs, manufacturers need reasonable markets and profits, and oncologists need incentives to use generics,” Gatesman and Smith wrote. “The only good news is that the drug shortages may catalyze a shift from a mostly market-based system to one that rewards the provision of high-quality cancer care at an affordable cost.”