Health system-led drug company unlikely to make a dent in drug prices, shortages

As four not-for-profit health systems unveiled plans to create their own generic drug company Thursday, experts say they'll face an uphill battle to make a significant dent in one of the fastest-growing industry expenses and persistent problems: rising drug prices and drug shortages.

Intermountain Healthcare, Ascension, SSM Health and Trinity Health are working with the U.S. Department of Veterans Affairs to pool their capital and 450 total hospitals to fight back against drug companies that unexpectedly hike the prices of decades-old off-patent generic drugs with minimal competition. They also look to create a more reliable supply of generic drugs like saline and sodium bicarbonate that are vulnerable to shortages.

"Our goal is not to create a competitive advantage for the people who participate in this, it is about creating a company that has a social benefit of making sure that anyone who needs the medication we produce has it at their disposal," said Dr. Marc Harrison, president and CEO of Salt Lake City-based Intermountain Healthcare.

While the health systems didn't specify what drugs their new venture will make, they want to provide both sterile injectables and oral medication either through their own FDA-approved manufacturing facility or by contracting with existing manufacturers. Most hospitals have some compounding pharmacy capacity, but the initiative will not use hospital compounding facilities to produce products, Harrison said.

Experts said that contracting or acquiring an existing manufacturer would be a more efficient path for the providers, as building new manufacturing facilities and infrastructure creates an array of challenges.

"I applaud the effort and while I think it is great, it is going to be a labor-intensive and costly endeavor to set up manufacturing efforts," said Michael Rea, CEO of Rx Savings Solutions, a company that sells software to health insurers and self-insured employers to help them lower their drug costs. "There are no new entrants to the market because it is so difficult to get into, but having the capital source of hospitals is a great start—now they need to execute on the plan."

Players across the health industry have discussed how to cope with dramatic price hikes of widely used drugs coupled with enduring drug shortages, but solutions have been harder to come by. Retail prescription drug expenses accounted for about 12% of total U.S. healthcare spending in 2015, up from about 7% through the 1990s, according to a recent report from the U.S. Government Accountability Office. Branded drugs with no generic alternatives, or single-source drugs, are the main culprit, another study from Blue Cross and Blue Shield Association found. These patent-protected drugs make up 63% of total drug spending.

But even off-patent drugs are part of the drug price dilemma. Valeant Pharmaceuticals, for example, acquired the rights to the off-patent heart drugs nitroprusside and isoproterenol and increased their respective prices 30-fold and 70-fold over a three-year span. The Cleveland Clinic found that utilization across 47 hospitals it studied decreased utilization by 53% and 35% for nitroprusside and isoproterenol respectively, which took a toll on patient safety and outcomes.

Nearly two dozen companies have since been accused of price-fixing and manipulating markets in a civil probe by a number of U.S. states.

"It is a welcome development that could help promote competition and ensure access, particularly for non-high volume generic drugs, and should serve as a wake-up call for companies who have gouged vulnerable patients," said Ameet Sarpatwari, assistant director of the program on regulation, therapeutics and law at Brigham and Women's Hospital and Harvard Medical School.

Scott Knoer, Cleveland Clinic's chief pharmacy officer, said he is interested in learning more to see about the viability of partnering in the new generic drug company or re-creating the model. The Cleveland Clinic also plans to expand its compounding facility to create IV products and other drugs in large batches as a reserve supply to be distributed throughout its system. Currently, it only has approval to create the drugs to fill an immediate need amid a shortage.

"The more entries into the market the better—competition lowers prices. Hospitals are tired of unsustainable drug price increases and I like that this group is fighting back," Knoer said. "While it is an intriguing business opportunity, it is not without risks since it isn't cheap to become a manufacturer and generic competition is harsh. For the most part, generic medications, with some obvious exceptions like the sole-source drugs with Valeant, aren't the problem with big price increases."

The Food and Drug Administration has reformed policy to create more competition by expediting new generic drug applications for drugs that have less than three competitors. The agency also published a list of sole-source drugs to spur applications.

Some group purchasing organizations have created private drug labels where they contract directly with a manufacturing company to make a generic drug under their own brand name. This strategy provides a cheaper alternative to buying brand-name drugs and GPOs have more control over the manufacturing process.

"Patients benefit when competition exists in the market, but what's critical is ensuring the right policies are in place to create a sustainable system to prevent the circumstances that lead to shortages in the first place," Chip Davis, the president and CEO of the Association for Accessible Medicines, the trade group representing generic manufacturers.

Since the news was announced Thursday morning, several health systems have reached out to ask about partnering, executives said.

"This is about addressing places where artificial shortages have been created and egregious drug pricing has been applied," Intermountain's Harrison said.