Setting The Record Straight On Drug Shortages

John Goodman of the National Center for Policy Analysis (NCPA) says in a recent blog entry that the Public Health Service 340B drug discount program is part of a “web of [federal] regulations that are preventing life saving drugs from reaching the patients who need them.” More specifically, he says that the program, which provides discounted drugs to safety-net institutions such as hospitals and clinics that treat large numbers of indigent patients, is “contributing” to severe prescription drug shortages.

His essay, however, offers no factual support for its claim that the 340B program is somehow causing shortages. His entire case against 340B drug discounts rests upon his belief that “when prices are kept artificially low, shortages develop.”

Last month, the Pharmaceutical Research and Manufacturers of America (PhRMA) issued a statement on drug shortages and their causes. Citing the Food and Drug Administration (FDA) and other experts, the industry group says shortages can occur

for any number of reasons ranging from natural disasters; shifts in clinical practices; wholesaler and pharmacy inventory practices; raw material shortages; changes in hospital and pharmacy contractual relationships with suppliers and wholesalers that can cause fluctuations in the availability of certain products; adherence to FDA-mandated distribution protocols, which can impact patients’ timely access to medicines; individual company decisions to discontinue specific medicines; and manufacturing challenges.

The absence of any mention of 340B, or of government limits on drug prices more generally, is noteworthy given that PhRMA is not very fond of such programs.


Why The 340B Program Does Not Cause Drug Shortages

A recent analysis conducted by my organization, Safety Net Hospitals for Pharmaceutical Access (SNHPA), found that a vast majority of the more than 200 drugs listed by the FDA as being in short supply are generic products. According to the American Society of Health System Pharmacists (ASHP), which has been studying and keeping track of drug shortages for more than a decade, between 50 and 60 percent of the drugs in short supply last year were injectable products and a majority of them were generic. (Reilly, Cynthia. Telephone interview with SNHPA. June 10, 2011.)

That’s highly relevant because hospitals that do not participate in 340B can often buy generic drugs for less than hospitals that are enrolled. (That’s not the case for more expensive brand-name drugs.) In other words: If generic drugs are in short supply, it is unlikely to be because safety-net health care providers are buying them up at prices lower than anyone else can get.

In addition, the Health Resources and Services Administration (HRSA), the unit within the U.S. Department of Health and Human Services (HHS) that oversees 340B, estimates that purchases under the program make up less than 2 percent of the U.S. prescription drug market. We think it is reasonable to believe that shortages probably have more to do with the other 98 percent of the market.

Moreover, to the degree that government price controls might be playing a role in shortages, we note that the 340B program is dwarfed by the Medicaid drug rebate program, with 340B-enrolled providers spending $6 billion on covered outpatient drugs annually, compared with the approximately $23 billion that Medicaid spends yearly on prescription drugs. We also note that the Department of Defense (DOD) and Department of Veterans Affairs (VA) pharmacy benefit programs use statutorily mandated discounts to limit drug spending. In fiscal year 2009, DOD spent about $7.7 billion and VA about $3.7 billion on prescription drugs.

Listening To The Hospitals

Mr. Goodman expresses concern about drug shortages at our nation’s university hospitals. My organization, Safety Net Hospitals for Pharmaceutical Access, includes virtually every academic medical center in the country. None, to my knowledge, has cited the 340B program as a factor in actual instances of drug shortages.

In fact, The Johns Hopkins Hospital, one of those mentioned as rationing the cancer drug cytarabine says, “there is no evidence that the 340B program has contributed to shortage problems.” “Cytarabine is a generic drug, and the 340B program has a very small impact on pharmaceutical sales, yet it is of great importance to hospitals that treat large populations of uninsured and underinsured patients,” according to Vanessa Wasta, associate director of media relations at Hopkins.

Take the word of Shirley Geize, assistant director of purchasing and contracting for pharmacy at Hopkins, a 340B-enrolled institution serving inner city Baltimore. (Geize, Shirley. Telephone interview with SNHPA. June 10, 2011.) She says that, thanks to its participation in 340B, her hospital saved $15 million in fiscal 2010 out of $90 million in total combined ambulatory and inpatient drug expenditures. Most of the money saved is on outpatient chemotherapy agents.

Participation in 340B, Ms. Geize says, “means the ability to maintain our contribution to this community.” “Without it, in these financial times, it would mean having to limit our charity care program or finding other sources of support,” she continues. “No, we couldn’t fill the gap if 340B disappeared.”

Michael Powell, executive director of pharmacy services at The Nebraska Medical Center, another hospital cited in Goodman’s post, says that the 340B program “is critical to our institution’s ability to provide access to pharmaceutical care for our most vulnerable patient populations, who would otherwise not be able to obtain prescription medications.” (Powell, Michael. Telephone interview with SNHPA. June 15, 2011.) “The savings achieved through 340B pricing help us to sustain other vital services, in addition to pharmaceutical care,” he says.

A Letter To Secretary Leavitt And What It Really Said

Mr. Goodman says that shortages have been getting progressively worse since 2005, when hospitals complained to Health and Human Services Secretary Michael Leavitt that drug manufacturers and distributors were citing drug shortages on expensive products such as blood supplies. Mr. Goodman’s article links to the letter that the hospitals sent to Secretary Leavitt.

That was our letter. We used to be the Public Hospital Pharmacy Coalition (PHPC) before we became SNHPA, which represents more than 700 hospitals enrolled in the 340B program, from the largest urban hospitals to the smallest ones in remote rural areas.

We support 340B. We would like to see it expanded to the inpatient setting. We would like to see a ban on discounts on orphan drugs lifted for rural and cancer hospitals. And we do not think 340B causes drug shortages. In fact, it’s disconcerting to see our letter used to advance the argument that 340B should be repealed.

We wrote to Secretary Leavitt to inform him that some pharmaceutical companies, most notably those that make the blood product intravenous immunoglobulin (IVIG), were refusing to sell their products to 340B providers, ostensibly because there was no supply. In fact, there was plenty of supply available to commercial and retail entities that contracted directly with the companies, but nothing available to 340B providers.

The 340B Program: A Small Investment For A Large Return

The federal government spends a little over $2 million a year (that’s million with an M, not billion or trillion) administering the 340B program. The program has fewer than 20 workers. It recently had to cut its technical assistance program to the bone due to inadequate funding. And yet the 340B program saves taxpayers a vast amount of money, since 340B providers share their savings from the program with Medicaid and many entities in the program are federal grantees or state or local government institutions.

It’s beyond us why anyone would seriously question the value of a program that is proven to improve care and save money.

Ted Slafsky is the executive director of Safety Net Hospitals for Pharmaceutical Access (SNHPA), a non-profit organization of approximately 700 hospitals and health systems participating in the federal 340B drug discount program.

This post first appeared at Health Affairs Blog on 06/21/2011. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

7 replies »

  1. I am afraid Mr Goodman is wrong here. We are a Critical Access Hospital in the 340B program but hardly use it because we cant get any discounts on the expensive drugs we use. This is because of orphan status rule. Our little hospital spends almost $200,000 per year on IVIG and might get reimbursed half that. If that is what market price is, then we must soon start turning patients away. We have seen numerous shortages of this product over the years but its not due to 340B. They wont let us use 340B on this orphan drug. The multiple drugs in short supply are generic drugs right now as Mr Slafsky states. I still think this is due to over-regulation of the industry with things like ‘FDA mandated distribution protocols”. Does the FDA realize that these mandates result in us not being able to get dexamethasone?

  2. Thanks Jonathan. The Goodman acolytes will not respond. Wish they would but they never do.


  3. Devon, did you read the part about how there are generally not significant savings for generic drugs? It’s the brand name drugs where the program really makes a difference, and there is no shortage there.

    The reason is that the price of the brand drugs in the market is not the market clearing price. You are assuming perfect competition. You cannot make that assumption. In fact, brand drugs are protected by patent, so they are able to restrict competition and command a premium price. Pharma companies make enormous profits on these drugs (pharma has the highest profit margins any large US industry, matched only by investment banking). Even if prices are cut substantially, it will still be profitable to sell these drugs, which is why the pharma companies sell brand drugs to European nations, Medicaid and 340B.

    As for the generics, margins are indeed much lower. I’m going to take a wild guess and say that is why the 340B program doesn’t extract substantial discounts on these drugs: it takes the business conditions into consideration. And then there is Steve’s point that this program only accounts for 2% of the drug market.

  4. ” purchases under the program make up less than 2 percent of the U.S. prescription drug market. We think it is reasonable to believe that shortages probably have more to do with the other 98 percent of the market.”

    How do lower prices for 2% of the market cause shortages? Even if they were given out free, the prices for generics vary by more than 2% across the country and even at facilities 2 miles apart. Did these shortages occur only for 340B drugs? Why would it affect some generics and not others?
    My surgicenter pays 15% more for Propofol than does my hospital. Both saw shortages.


  5. I’m wholly in agreement with Dr. Herrick. The post by Slafsky simply lacks credibility. Below-market prices in health care breed restricted access and increased waiting. Worse, it’s increasingly harder for seniors and the disabled on Medicare to find doctors who will see them. People on Medicaid are having to turn to community health centers and safety net hospital emergency rooms for the care they need. And SCHIP children face long waits. Not surprisingly, the newly insured in Massachusetts find it much harder to see doctors than the privately insured. Why should the market for drugs be any different? Hint: it won’t. Like Herrick, I think this is Econ. 101.

  6. Comment via Health Affairs Blog

    John Goodman says:

    I’m not quite sure how to respond to Ted Slafsky. He insists that the 340B program has in no way caused the current and growing shortage of drugs available to hospitals. He then says:

    “We wrote to Secretary Leavitt to inform him that some pharmaceutical companies, most notably those that make the blood product intravenous immunoglobulin (IVIG), were refusing to sell their products to 340B providers, ostensibly because there was no supply. In fact, there was plenty of supply available to commercial and retail entities that contracted directly with the companies, but nothing available to 340B providers.”

    Let’s see if I understand what I just read. Every buyer who was paying the market price had no difficulty getting the drug. But those that were paying below market could not get it. Slafsky can’t tell us why that was, but he is sure that it had nothing to do with price.


  7. Mandating a price that’s below the market clearing price always results in a shortage, as demand exceeds supply. That is a fundamental tenant of economics. Moreover, generic drugs are largely a commodity market, with slim profit margins. It makes sense that some generic drug makers would not be enthusiastic to provide injectable drugs at below-market prices.