In general, there are two reasons why shortages might appear in a market. The first is high fixed costs. These include regulatory costs, the costs of converting a manufacturing plant to a new use, or the costs of creating a new factory. Industries with high fixed costs will see temporary shortages after either supply shocks (e.g., a factory goes offline) or demand shocks (e.g., an increase in the population needing a drug). The price mechanism eventually resolves such shortages. The duration of the shortage is related to the size of the fixed costs.
Shortages also appear when something interferes with the price mechanism’s ability to resolve a shortage. The classic example is government price controls (i.e., a binding price ceiling). Such shortages persist as long as the price controls (e.g., rent control) remain in place and binding.
From my study of the current spate of drug shortages, the best accounting for these shortages appears in this publication by the U.S. Department of Health and Human Services: “Economic Analysis of the Causes of Drug Shortages,” Issue Brief, October 2011.
I initially suspected these drug shortages were caused by Medicare’s Part B drug-payment system. Others, including Scott Gottleib and the Wall Street Journal, have made that claim. However, this study and a lengthy discussion with the U.S. Department of Health and Human Services’ assistant secretary for planning and evaluation have persuaded me that not only is Medicare’s Part B drug-payment system not the cause, that system doesn’t even impose binding price controls. Rather, it controls the margins that physicians earn for administering a drug. (If Medicare did impose binding price controls, would we see mark-ups of 650 percent or more for the shortage drugs?)
Rather, the shortages appear to be the result of a number of dynamics in the market for rare drugs:
It’s cool. So cool, that President Obama used one. So cool, it’s been on the cover of Newsweek. It’s been in multiple television commercials, radio advertisements, highway billboards, and was even coined one of the top 14 medical breakthroughs of 2011 by Boston Magazine, a city teeming with medical innovation. Yet surgeons and health economists are unable to explain the fascinating rise of robotic-assisted surgery.
Currently, a single company manufactures and distributes the robot, a line of surgical equipment used to conduct robotic-assisted surgery. The robotic system consists of a surgeon’s console with 3-dimensional high definition vision and a patient-side cart featuring robotic arms with proprietary wristed instruments. The system translates the surgeon’s natural hand movements on instrument controls into corresponding movements of instruments inside the patient, giving the surgeon control, range of motion, and depth of vision similar to open surgery.
The sole manufacturer hopes to establish the robot as the standard for surgical procedures by encouraging surgeons and hospitals to adapt the technique while marketing aggressively to patients about the benefits of robotic surgery. As of June 2011, the manufacturer had installed 1,933 robotic systems. They estimate that 278,000 robotic-assisted surgical procedures were performed in 2010, up 35% from 2009, and aims to achieve one million annual procedures in the United States over the next few years (Invester Report 2011). To achieve this goal, the manufacturer strategically markets to smaller hospitals and surgeons who may not be skilled at conventional laparoscopy to give them an edge for attracting patients.
Doctors can and often do prescribe medications for different purposes than what the FDA has approved them for. But drug companies face tight restrictions on communicating with physicians about these so-called “off-label” uses. If the pharmaceutical industry has its way, those restrictions may soon ease. Such a change would be healthy overall.
Drugs undergo clinical trials for specific indications, such as Avastin for colorectal cancer. The label received from the FDA upon approval allows the manufacturer to promote the drug to physicians for those specific indications only. But a drug that works for one disease may work for a related disorder (e.g., another form of cancer) or something that seems totally different, like macular degeneration. Often the drug company will follow its initial clinical trials with trials for other indications in order to broaden the label and expand sales, but salespeople can’t bring up these uses until they’re officially on-label.
Drug companies get in trouble all the time for off-label promotion. According to the Wall Street Journal (The Free Speech Pill), 15 off-label cases were settled between 1996 and 2010 for a total of $8.7B.
FDA decides whether drugs, biologics and medical devices are safe and effective and can be marketed legally in the United States. The agency analyzes risk-benefit, but never cost. In contrast, public and private insurers, along with physicians and pharmacists, have the responsibility for cost-benefit decision making.
I have always felt quite strongly that this was the right way to allocate roles. Safety and efficacy determinations are difficult enough without weighing cost, so keeping a barrier between them makes sense. Two events this past week have left me wondering whether there are certain limited circumstances when FDA should be able to take product cost into consideration.
On September 26, 2011, The Oncology Commission of the British medical journal, Lancet, released a report entitled: “Delivering Affordable Cancer Care in High-Income Countries.” The 40-page report is wide-ranging, but its conclusion straightforward: as cancer care grows more expensive (and it is doing so at a rapid pace), affordability, accessibility and value are issues that need to be confronted aggressively.
FDA is proposing regulation for mobile medical applications. Not a bad idea. But I have some concerns about what it will mean for clinical diagnostics software. Here’s the definitional passage:
Mobile apps that allow the user to input patient-specific information and – using formulae or processing algorithms – output a patient-specific result, diagnosis, or treatment recommendation to be used in clinical practice or to assist in making clinical decisions. Examples include mobile apps that provide a questionnaire for collecting patient-specific lab results and compute the prognosis of a particular condition or disease, perform calculations that result in an index or score, calculate dosage for a specific medication or radiation treatment, or provide recommendations that aid a clinician in making a diagnosis or selecting a specific treatment for a patient.
Apps that provide differential diagnosis tools for a clinician to systematically compare and contrast clinical findings (symptoms/ results, etc.) to arrive at possible diagnosis for a patient.
Back in the times when EHRs were just EMRs, they had a very simple and humble mission. The software was supposed to help providers of health care services better manage their business. EMRs were supposed to help physicians adhere to CMS documentation rules, automate patient flow management and get rid of all the mountains of paper floating around a typical medical office or hospital. It was assumed that EMR software will increase reimbursement rates, streamline workflow and even make the doctor more efficient. After all, every other industry that switched to computerized business management realized bottom line improvements.
Along the way, bolder statements started appearing, mainly from EMR vendors trying to sell their wares. EMRs could also reduce medical errors. The most common argument was for the benefits of replacing the notoriously illegible physician hand writing. Prescription errors would be reduced if only pharmacists and nurses could get a nice legible script. Then came the frequently misplaced paper charts. If the chart resides in the computer, it cannot be misplaced, it is always available to all and it is complete. All the information you need right at your fingertips, regardless of your physical location. It could save lives or at the very least, it could save time. The EMR was nothing more than an electronic chart. One vendor went so far as to create a computerized image of a yellow manila folder with tabbed pockets for various items in the electronic chart.Continue reading…
By MERRILL GOOZNER Journalist-turned-stock-analyst Ramsey Baghdadi of Concept Capital, who formerly wrote for the RPM Report, tells TheStreet.comthat Food and Drug Administration Advisory Committee recommendations are down to 52 percent “yes” votes this year, “the worst year since 2007.” He compares that unfavorably to 2009 and 2008 when the advisors gave positive nods 75 and 80 percent of the time.
Reasons for the tougher regulatory environment, according to Baghdadi? “First, the FDA is bringing more drugs in front of advisory panels due to changes in FDA law that require most new drugs to be reviewed by outside experts,” the article notes. “Second, stricter conflict of interest rules implemented by FDA (in the wake of the 2007 reform law) have made it more difficult for the agency to recruit experienced panel members.”
If inexperienced members without conflicts of interest are more prone to voting no, how does that explain 2007, when the current rules weren’t in place and there were still 50 percent “no” votes?Continue reading…
So says Jim Dickinson, editor of FDAWebview, an industry newsletter that closely follows enforcement issues at the agency. After reviewing the deregulatory shifts at the Food and Drug Administration since the Carter administration, he writes:
It has taken almost a generation, but by now, the pro-industry infiltration of FDA’s culture is firmly entrenched. Not only is collaboration in product reviews officially encouraged, but good relationships across the regulatory fence hold the prospect of a possible future career in a well-paid industry job – a connection that is less likely to be publicly noticed in news media that now have to line up for information that has been filtered through agency press offices. The arm’s-length relationship that formerly ruled every contact between agency and industry has become a fading memory.
He says the shift in culture accelerated after the 1992 passage of the Prescription Drug User Fee Act, which made the agency dependent on industry funding. He concludes there’s nothing that Margaret Hamburg, the new commissioner, and Joshua Sharfstein, her deputy, can do about it. Quoting a former chief of enforcement, he writes:
User fees at FDA are the primary villain, because they “allowed the industry to dictate the changes at the FDA in programs, procedures and practices. It will be impossible for the Obama administration to reverse the trend because as long as the user fees are in place the industry has the upper hand.”
The Association of Health Care Journalists, the Society of Professional Journalists and 9 other scribbler groups have asked the Food and Drug Administration to lift its requirement that agency officials first get permission from the public relations office before speaking with reporters. The demand came in a letter sent to Principal Deputy Commissioner Joshua Sharfstein, who is running the FDA's Transparency Task Force.
Good idea. In fact, it should be extended to every government agency.
The FDA has been widely criticized for not providing guidance for drug companies eager to promote their products on the internet. Earlier this year, the FDA expressed the view that the message was what was important, not the medium, meaning that companies should simply apply the rules governing prescription drug advertising in print media to the internet. On April 2, 2009 the agency issued Notice of Violation letters to 14 companies who sponsored links on internet search engines advertising their products; the links gave the name of the drug and, in some cases, its indicated use, without including the required “fair balance,” i.e., safety information such as contraindications and potential side effects. In reliance on the so-called “one-click rule” — which had never actually been adopted by the FDA — the companies had put the required safety information one click away on a separate page.
In recent months, the FDA has indicated that it is open to providing internet-specific marketing guidance. Yesterday and today (November 13th) the agency is holding a hearing on “Promotion of FDA–Regulated Medical Products Using the Internet and Social Media Tools.” Representatives from advertising agencies, consumer groups, health-related websites, pharmaceutical companies, and search engines are scheduled to testify.