Generic Drug Shortages and the Lunacy of Price Controls

Generic Drug Shortages and the Lunacy of Price Controls

Generic Drug Shortages and the Rolling Lunacy of Price Controls

Wes Chapman

April 9, 2014

“History doesn’t repeat itself, but it does rhyme”.

Mark Twain

In 2003 one of the largest pieces of drug purchasing and pricing legislation ever crawled out of the inchoate goo that was the policy apparatus of the Bush Administration, the Medicare Prescription Drug, Improvement, and Modernization Act. Included in this immodestly named, legislative Verdun was a little noticed and spectacularly pathological provision – limiting the price increase on generic injectable drugs purchased by Medicare to 6% every six months – based on the lowest price recorded in the market. A single downtick in prices (for whatever reason, fair or foul) set the price for generic injectable drugs forever. The resulting price levels may or may not bear any resemblance to economic reality. Imagine if Walmart and BestBuy were forced to stick to Black Friday prices throughout the entire year – they wouldn’t be in business long. Generic drug manufacturers live with the same economic reality.

Until this piece of legislative nonsense was passed, there were virtually no shortages of generic drugs – if supplies got short, prices went up and more capacity came on stream. Such is the reliable magic of Adam Smith’s invisible hand – we fought and won the Cold War to protect our right to shake that hand vigorously. Like so many other incomprehensibly bad policies of the Bush Administration, the invisible hand of the market was amputated by legislative fiat in 2003, and replaced by the cold, lifeless, prosthetic grip of price controls, and the predictable results are highlighted below.

          Graph of Drug shortage Causes

Drug Shortages – a Fiasco Measured in Human Suffering

The odd thing about generic injectable drugs, is that their impact is disproportionately felt in the oncology market. Oncology generics are mainstays of treatment in many areas – particularly pediatric cancers and leukemia. As noted in the Speak Up for Kids’ Cancer publication, “Pediatric oncologists have depended on daunorubicin  as a go-to treatment for kids with these leukemias for nearly 40 years.  The fact that it has been difficult for many hospitals to obtain caused alarm bells to go off within the pediatric cancer community and sparked an inquiry from Congress to the U.S. Food and Drug Administration (FDA).”

The response to this shortage was a call for action to the FDA from Congress, and the demand for use of executive powers granted the Obama Administration in 2011 to deal with such critical shortages. To paraphrase the FDA’s response – the drug was in shortage because people had stopped making it. They would try to talk somebody else in to making it, or maybe find some offshore.

As we move boldly into the 5th decade of Dick Nixon’s endless War on Cancer (we were originally scheduled to have cured cancer in 1980), we have finally succumbed to the nonsense of price controls, another of Nixon’s favorite policy follies. Like the self-inflicted gasoline shortages of 1973 and 1979, our Washington bureaucrats are mucking around in free market pricing, and the predictable results are shortages, black markets and gas-bag legislators spouting nonsense.

The problem is that everybody buys gasoline, and we understand how it should be supplied. Drug shortages are opaque to the vast majority of Americans, and virtually none of the victims understands that their suffering and/or death were unnecessary. Certainly not the children. The gasoline shortages produced near revolt, and eventually the price controls were removed. The shortage of generic drugs touches a tiny minority of Americans, and its solution will require clear thinking legislation and practical regulation. Good luck with that.

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A long and proud history of failed price controls

Shortage category

So many shortages, so little time

What makes this crisis so maddening is that the money involved here is trivial – the total spend on this drug class amounts to .5% of total cancer care costs, and would be the most cost efficient portion of total cancer spend even if its price increased by a factor of 2. What we are doing here is simply madness.

Predictably, given an infinite array of solutions, our Congress has chosen the one least likely to have any beneficial impact – greater regulatory powers to the FDA. They have been given the FDA plenipotentiary powers to deal with generic drug manufacturers domestic and foreign in every way except the only one that matters – product price. Imagine the happiness with which those generic drug manufacturers receive regulatory visits from the most threatening regulatory agency in the US. These manufacturers are suffering from devastated sales and profits resulting from price controls imposed by the Federal Government. In through the door walks the FDA, recently empowered with new regulatory “tools” to deal with recalcitrant drug manufacturers. From a CEO’s perspective this looks like the regulatory equivalent of waterboarding – another innovation from the Bush Administration.

There is plenty of bi-partisan blame to be passed around here. The response from the Obama Administration and the Democrats in Congress has been predictably tepid and equivocal. A NYT piece written by its de-facto healthcare spokesman, Dr. Ezekiel J. Emanuel, said, ”Unfortunately, there is no quick fix, because all solutions require legislation. A bill introduced in February by Senator Amy Klobuchar, Democrat of Minnesota, and Senator Bob Casey, Democrat of Pennsylvania, would require generic manufacturers to notify the Food and Drug Administration if they expected a supply problem or planned to stop manufacturing a drug. But the F.D.A. isn’t able to force manufacturers to produce a drug, and learning about impending shortages with little authority to alleviate them is of limited benefit.” This is hardly the stuff of bold thinking leaders, and speaks to what seems to a mysterious and insoluble problem – it is hogwash.

This has to be the archetype of horrible social policy, made without the benefit of consideration of a null-hypothesis, (check out my blog on the subject).

In the final act of this theater of the absurd, the FDA put out a video (FDA Video) with actors schooled in Bobby Jindal method acting. The video is seemingly targeted at 4th graders interested shortages of generic injectable oncology drugs.

Perhaps most terrifying, is the official GAO report on the problem. This piece of bureaucratic literary legerdemain is the stuff of legend, (GAO Report). This nonsensical report buries any discussion of the impact of price controls until page 82 of Appendix IV. Imagine the fantasy of bureaucratic bungling that is the first 81 pages. It is safe to say that this price induced drug shortage is a good piece of political fodder – bad drug producers and greedy doctors pitted against the elected defenders of goodness and their bureaucratic handmaidens. The first administration devoted to bringing equity to American healthcare is incapable of applying freshman year economics to bring generic drugs to children dying of cancer. The shame is unspeakable.

Wes Chapman
Written by Wes Chapman

1 Comment responses

  1. Avatar

    Masterful piece highlighting the perils of obstructing the invisible hand from performing its critical and socially beneficial function. The 70’s energy price control parallel rhymes ominously — the gasoline shortages proved to be sideshow warm ups for the 80’s oil field carnage induced by the consequent capital misallocation. Truly tragic for cancer patients. I despair of a couple Matterhorn scale obstacles:

    –The invisible hand has been impeded broadly in all of health care since the onset of WW II, breeding general fear of having it restored;

    –The ACA and its proponents demonstrate the deep hostility to the invisible hand embedded in the governing class.

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