Hospitals nationwide are experiencing shortages of critical generic intravenous drugs. We believe a fundamental reason for this national shortage is government price controls. With these limits there is little incentive to invest in new facilities and technologies, leading to equipment failures. Manufacturers have little economic incentive to prepare proactively for the quality assurance issues that routinely arise in the manufacturing of a sterile injectable compound. To reincentivize this process, the market needs to be free. spurring more manufacturers to produce these drugs, encourage reinvestment in facilities and the stockpiling of reserves.
The drugs in shortest supply include those used in critical care units such as norepinephrine for shock, antibiotics for infections, and cancer chemotherapy. Almost all are generics and manufactured by a just few companies. Among the oncology drugs in short supply are cytarabine and leukovorin. Cytarabine is the best single drug for acute myeloid leukemia. Leukovorin is used in childhood acute lymphoblastic leukemia.
These are older “off patent” drugs. As generics, they are far less expensive that newer drugs. They have stood the test of time, are still used extensively and are necessary for optimal patient care. Individual patients need exactly the right drugs on precisely the right schedule – no substitutes; now, not later. As pointed out in Congressional testimony and a Wall Street Journal editorial, these shortages are having a major negative impact for ongoing clinical trials designed to improve cancer treatment results. Another critically needed cancer drug is Doxil, a drug used for the treatment of many cancers. It is sold by Johnson and Johnson (J&J) and until recently it had been manufactured on contract for J&J by Ben Venue Laboratories. Unfortunately, Ben Venue is exiting the contract drug business. Thus, Doxil is not currently available. Prior to 2003, Medicare paid for cancer chemotherapy injectables based on the average wholesale price. But with no transparency, some distributors or physicians could reap huge profits. To combat this and with the best of intentions, a new system was developed as part of the Medicare Modernization Act of 2003, based instead on the average selling price updated quarterly.
Oncologists, who purchase the drugs from distributors and then administer them, are reimbursed the ASP plus a 6% administrative fee. This would at first glace seem perfectly reasonable. Not quite. In effect, it means that Medicare allows a maximum of only a 6% increase per year; any more and the reimbursement would be less than the cost. In the generic drug business prices can decline tremendously. If the price drops too low, some manufacturers simply cease producing it and use their capacity to make other more profitable drugs. The remaining producers cannot raise their prices more than 6%, so they have little incentive to make up for lost capacity by investing in new plant or equipment. The system has broken and needs to be fixed soon or patients will die.
President Obama recently signed an executive order requiring manufacturers to notify the FDA at least six months in advance of discontinuing a critical injectable sterile medication. This will be useful in a few situations, such as Doxil, but it will be of little help when companies must suspend manufacturing immediately due to finding a contaminant, having an equipment breakdown, etc. The New York Times called the President’s measures “useful first steps,” but emphasized that Congress needs to take up long stalled legislation. We agree but believe that the legislation needs to focus on raising the profit margin allowed under Medicare. This could be done by permitting the marketplace to set the value of these critical drugs in a transparent manner.
Concurrently, oncologists should be paid an appropriate administrative fee based on the time and effort required per specific drug rather than a flat percentage of the cost. This would eliminate the temptation noted recently in the New England Journal of Medicine to substitute a more expensive drug (6% of a higher priced drug means a greater income than 6% of a lower cost drug).
With our recommendation, prices will still be very cheap compared to on patent drugs yet rise to the point sufficiently profitable for the generic producers to invest in their manufacturing capacity, create redundant production lines and encourage more manufacturers to enter the marketplace. Combined, these changes will reduce quality control issues, create backup options, and maintain a stable supply of these vital drugs for the patients who desperately need them.
Stephen Schimpff is the former CEO of the University of Maryland Medical Center and the former senior investigator at the National Cancer Institute. Curt Civin is professor of pediatrics and physiology, director of the Center for Stem Cell Biology & Regenerative Medicine, and associate dean for research at the University of Maryland School of Medicine. This piece first appeared in the Baltimore Sun.
1) I thought it was 6% increase per quarter?
2) This is happening, AFAICT, only with low profit margin generics. The same 6% rule holds for on patent drugs, yet does not seem to affect them. Why?
3) If only one or two companies are making the drug, wont we face shortages even with the ability to raise prices without limits? With such low profit margins, it seems likely that only a couple of the most cost effective producers will be making the drugs. If one, or all, go down, what is the solution. (Since they all get the same inputs, probably from China, this is actually a probable event.)
4) I dont think that Medicare is buying all of these drugs. What purchasing rules do private insurers follow?