Hospitals have long been bedeviled by shortages and price spikes for the generic drugs that are essential to their day-to-day operations.
Earlier this month, a coalition of U.S. hospital systems launched a business venture that offers the most promising approach yet for solving these twin problems.
Intermountain Healthcare, Ascension, SSM Health and Trinity Health formed a not-for-profit company that by the end of 2019 plans to begin producing affordable generics that are chronically in short supply. Critical commodities like injectable antibiotics and sodium bicarbonate are likely first targets.
Each generic experiencing a shortage-driven price spike has a similar back story: after low prices drove alternative makers out of that product line, shortages ensue. Then the remaining manufacturer raised prices significantly.
Sometimes bad actors like Valeant buy the remaining manufacturer and impose triple-digit price hikes. Sometimes greedy manufacturers take advantage of the situation themselves. And sometimes gray-market middlemen add insult to injury by tacking on their own mark-ups.
Whatever the particulars, the seller of what should be a low-cost item turns itself into a monopolistic provider that can charge whatever the market will bear. That's intolerable if you are on the buy side of the transaction, especially when the product is essential to human health.
Food and Drug Administration Commissioner Dr. Scott Gottlieb's plan to address the problem hinges on increasing competition. He's promised to expedite the review of generic-drug applications; shorten their review time; and give guidance on how new entrants can avoid errors in their generic-drug applications.
But regulatory relief for potential competition does nothing to address the underlying problem: the low prices that drove out existing competition. The cycle will merely replay itself among the new entrants and the monopolist—perhaps with a different winner willing to gouge the marketplace.
In any case, not many new entrants will be willing to invest the capital and jump through regulatory hoops to produce generic drugs in short supply. When it comes to drugs, Wall Street and private investors want the high profits that come from guaranteed monopolies, not the low margins and endless price competition of a properly functioning generic marketplace.
A more realistic answer, short of direct price regulation, lies in organizing the buy side. One way to confront a natural monopoly (high barriers to entry, low marginal cost of production) is to create a monopsony—a single buyer.
However, in the case of healthcare, a single buyer is still at a disadvantage. It's not a negotiation when the buying group can't walk away because it desperately needs the product.
Hence the need to go into manufacturing. The Intermountain-led coalition says it initially will contract with existing manufacturers to produce the drugs on its priority list. But it hasn't ruled out direct manufacturing, which it would sell on a cost-plus basis to its hospital customers. The plus is needed to maintain the enterprise and provide a small return to the not-for-profit systems that made the initial investment.
It's notable that two large group purchasing organizations investigated but rejected this option a few years ago. They instead pursued private-label branding of generics after negotiating long-term contracts with the manufacturers. However, a sole-source maker still has the upper hand in negotiations, and the GPO still gets its markup.
The stakes for this new venture go well beyond the immediate need to reassert control over the pricing and supply of generics that have been around for decades. Over the next few years, very expensive cancer chemotherapies, biologics and drugs for rare diseases will start coming off patent. These specialty drugs have been the single biggest driver of rising healthcare costs.
Makers of generic versions of these specialty drugs and biosimilars, if left unchallenged, will engage in the same price-gouging tactics. The opportunity to significantly lower their cost may well rest on the presence of an alternative: a not-for-profit drug manufacturer steeped in healthcare's mission.
